Evaluating Microfinance InstitutionsPerformance Indicators

Session Objectives:

1. Establish crucial performance indicators for evaluating the performance of microfinance institutions.

2. Establish industry benchmarks for performance indicators

Microfinance Institutions - 2014

Banks with Microfinance-related activities

18%

82%

WORLDWIDE

Banks Non-Banks

33%

67%

ASIA

Banks Non-Banks

Categories of Performance Indicators

INDICATOR MEASURE

PORTFOLIO QUALITY • Portfolio at Risk Ratio (> 30 days)• Write-off Ratio

EFFICIENCY & PRODUCTIVITY • Operating Expense Ratio• Cost per Borrower• Loan Officer Productivity

FINANCIAL MANAGEMENT • Debt-Equity Ratio

PROFITABILITY • Return on Equity (ROE/AROE)• Return on Asset (ROA/AROA)• Portfolio Yield• Operational Self-Sufficiency• Financial Self-Sufficiency

PORTFOLIO QUALITY

• Portfolio-at-Risk Ratio (PAR)• Portion of the loan portfolio “contaminated” by arrearages, as a percentage of total loan

portfolio outstanding

• Based on specific number of days of delayed installment – not loan maturity date

• Microfinance loans being primarily collateral-free, quality of the portfolio is the most crucial measure

• Leading MFIs are typically better at maintaining a higher portfolio quality than their commercial bank peers in many countries.

• A microenterprise loan is typically considered to be at risk if a payment on it is more than 30 days late ~ stricter than what is practices among most commercial banks.

EFFICIENCY & PRODUCTIVITY

• Shows how well institution is streamlining its operation• Productivity – amount of output per unit of input

• Efficiency – cost of inputs ~ price of outputs

• Microfinance being highly labor-intensive, MFIs have much lower efficiencies vis-à-vis commercial banks

FINANCIAL MANAGEMENT

• Ensures sufficiency of liquidity to meet the MFI’s obligations to disburse loans to its borrowers, repay loans to its creditors and service withdrawal requirements of its depositors (in the case of banks).

PROFITABILITY

• Summary of performance of all aspects of the MFI

• Must be viewed in relation to operational efficiency and portfolio quality

• Comparing “apples to apples”• Caveat:

• A number of MFIs still receive grants and subsidized loans• No standardized accounting practice across MFIs ~ “creative accounting”• Especially true in the case of non-regulated/non-bank MFIs

• In areas where there is less competition, MFIs may operate in a “seller’s market.” In the absence of competition, even the most inefficient MFI can actually be profitable.

Performance Indicators International Standards

INDICATOR FORMULA STANDARD

PORTFOLIO QUALITY

Portfolio at Risk Ratio (PAR)

Outstanding balance portfolio with loan delays > 30 days

Outstanding Gross Loan Portfolio

≤ 5%

Write-off Ratio Value of loans written-offAverage Gross Loan Portfolio

≤ 2%

Performance Indicator Formulas

INDICATORS FORMULA

EFFICIENCY & PRODUCTIVITY

Operating Expense Ratio Operating ExpenseAverage Gross Portfolio

Cost per Borrower Operating ExpenseAverage No. of Active Borrowers

Loan Officer Caseload Number of Active BorrowersNumber of Loan Officers

FINANCIAL MANAGEMENT

Debt-Equity Ratio Total LiabilitiesTotal Equity

Performance Indicator Formulas

INDICATORS FORMULA

PROFITABILITY

Return on Equity Net IncomeAverage Equity

Return on Asset Net IncomeAverage Asset

Portfolio Yield Cash Financial RevenueAverage Gross Portfolio

Operational Self-Sufficiency (OSS)

Financial RevenueFinancial Expense + Impairment losses on loan +

Operating Exp.

Microfinance Industry Benchmarks ~ 2014(Source : Mix Market)

WORLDWIDE

All MFIs Banks Non-Banks

PORTFOLIO QUALITY

Portfolio-at-Risk >30days 5.34% 3.60% 5.71%Write-off Ratio 9.47% 37.78% 2.77%Loan Loss Rate 7.34% 31.40% 1.41%

EFFICIENCY & PRODUCTIVITY

Operating Cost Ratio 27.22% 26.25% 27.44%Loan Officer Caseload 243 273 234Cost per Borrower $494.70 $503.38 $492.55

Microfinance Industry Benchmarks ~ 2014(Source: Mix Market)

WORLDWIDE

All MFIs Banks Non-Banks

Financial Management

Debt-Equity Ratio 2.64 5.67 1.97Profitability

Return on Equity 5.08% 10.25% 3.88%

Return on Assets 0.14% 1.19% - 0.10%

Portfolio Yield (real) 25.41% 24.17% 25.71%

Operational Self-Sufficiency 111.93% 114.03% 111.46%

Thank You!