Financial management

Financial service provision is a business and managers have to understand the nature of their business and how to manage it effectively. Banks differ from cooperatives which differ from development oriented microfinance organisations, but all will wish to succeed in meeting their objectives and remaining in business. All will be involved in mobilising funds and using them to make loans. All, therefore, have to manage their assets, liabilities, liquidity, debtors, creditors, income and expenditure in a competent and effective manner.

Library Resources

resource title type year resource
Closing the SDG Financing Gap- Trends and Data 2019

view page
This resource appears in: Financial management

How big is the financing gap to achieve the 2030 Sustainable Development Goals (SDGs)? Can private capital fill the gap? This note provides an updated overview of estimates of SDG financing in low- and middle-income countries and gives an analytical and data-based foundation for discussion. Based on a review of recent studies, as well as IFC’s own calculations of cross-border flow trends, the note documents the ongoing and significant SDG financing gap. Raising taxes to expand public spending is an option for many middle-income countries to fill the gap, but it will be insufficient for low-income countries. Private financing, especially of infrastructure, can also contribute to bridging the gap, but it will depend on the availability of investable projects. Capital market development and improved domestic financial systems can help intermediate more private capital into available investment opportunities.

Author Djeneba Doumbia and Morten Lykke Lauridsen
Publisher IFC
Number of Pages 8 pages
Primary Language English (en)
Region / Country Global
Keywords finance gap, Emerging Markets, Business Management
Related Resources
Global Microscope 2019: The Enabling Environment for Financial Inclusion Report 2019

view page
This resource appears in: ICT applications, Financial management

The Global Microscope assesses the enabling environment for financial inclusion across 5 categories and 55 countries. In this 2019 edition, the EIU examines how countries are promoting financial inclusion for both women and men, 11 new gender-focused indicators have been added to the framework. The Microscope was originally developed for countries in the Latin American and Caribbean regions in 2007 and was expanded into a global study in 2009. Most of the research for this report, which included interviews and desk analysis, was conducted between June and September 2019. This work was supported by funding from the Bill & Melinda Gates Foundation, the Center for Financial Inclusion at Accion, IDB Invest and IDB LAB.

Author Mike Kenny, Emma Ruckley, William Shallcross, Nick Wolf
Publisher The Economist Intelligence Unit
Number of Pages 110 pages
Primary Language English (en)
Region / Country Global
Keywords Financial Inclusion, enabling environment, Consumer Protection, Policy, Regulation and Government Initiatives
Related Resources
Getting smarter on subsidy: The role of grant funding in smallholder finance Brief 2018

view page
This resource appears in: Financial management

The sixteenth Brefing Note in ISF's series aims to assess the role of grant funding in smallholder finance and understand how it can be used to unlock financing for millions of smallholders. ​

Early Insights from Financial Diaries of Smallholder Households Technical Note 2015

view page
This resource appears in: Financial management

The Smallholder Diaries are designed to enhance the understanding of the financial lives of smallholder families by capturing the cash flows of 270 households in Mozambique, Tanzania, and Pakistan over one year of their lives. At the end of the research, the extensive data will generate a balance sheet for each family that details all their sources and uses of income, highlighting the interplay among cash flows, the role of in-kind agricultural income, the financial tools in use, and the pain points where additional or improved financial tools could add value.

 

The Smallholder Diaries will provide a holistic picture of the financial lives of smallholder households not only as agricultural producers, but also as consumers, laborers, and off-farm entrepreneurs. The ultimate goal of this research is to translate the insights from the Smallholder Diaries into financial tools and provider practices that more effectively respond to the needs and preferences of this important client group. Drawing on initial data, this Focus Note shares early insights from the Smallholder Diaries, providing a first look at how smallholder households weave together agricultural and nonagricultural sources of income and employ a range of financial tools to meet their families’ needs. A nuanced picture of smallholder families will continue to emerge as more data are collected, with increasing focus on how they anticipate and manage risk, make household financial decisions, and leverage a range of financial tools.

Author Jamie Anderson and Wajiha Ahmed
Publisher CGAP
Washington, DC; USA
Number of Pages 20 pp.
Volume / Issue# No. 102
Primary Language English (en)
Region / Country Global
Mozambique, Tanzania, Pakistan
Keywords Financial Management, financial diaries, Smallholder Farming
Related Resources
Premières informations tirées des agendas financiers des ménages de petits exploitants agricoles Paper 2015 French (fr)

view page
This resource appears in: Financial management

Comprendre le comportement financier des petits agriculteurs

Les agendas des petits exploitants donnent une image globale de la situation financière des ménages non seulement en tant qu'agriculteurs, mais également en tant que consommateurs, travailleurs et entrepreneurs non agricoles. L’objectif de cette étude est d’utiliser les informations issues des agendas de petits exploitants pour développer des outils financiers et des pratiques de prestataires qui répondent plus efficacement aux besoins et aux préférences de ce segment important de la clientèle.

La présente Note d’information se base sur les premières données issues des agendas de petits exploitants pour formuler un premier aperçu de la façon dont les ménages de petits exploitants combinent les sources de revenus agricoles et non agricoles et utilisent une gamme d’outils financiers pour répondre aux besoins de leur famille. Une image plus nuancée des familles de petits exploitants pourra être formulée à mesure que de nouvelles données sont collectées, apportant des précisions sur la façon dont ils anticipent et gèrent les risques, prennent des décisions financières et exploitent les outils financiers.

Lien vers la publication  -  French (fr)

Author CGAP
Publisher CGAP
Number of Pages 20
Primary Language French (fr)
Region / Country Global, Africa, Asia
Pakistan, Mozambique, Tanzania
Keywords Finance rurale, Smallholder Farming, smallholder finance
Related Resources
Developing a Cost-Benefit Analysis Tool: Experiences and Lessons from Malawi and Mozambique Case Study 2009

view page
This resource appears in: Financial management

This case study shares the experience of Opportunity International in designing a cost-benefit analysis tool to evaluate and compare microfinance delivery channels. It chronicles the tool’s design and analysis features, the challenges faced, and offers practical experience to other microfinance institutions (MFIs) looking to design similar tools.

Author Walden, N.; Berger, E.
Publisher SEEP Network and Opportunity International
Number of Pages 16 pp.
Primary Language English (en)
Region / Country Global
Malawi, Mozambique
Keywords Cost-Benefit Analysis
Related Resources
Rural Finance For Small Farmers: An Integrated Approach Technical Note 2007

view page
This resource appears in: Financial management

This Women's World Bank (WWB)Focus Note gives an introduction to the key steps for success in adapting microfinance to agriculture and rural areas. It includes risks, client assessment, branch set-up and an introduction of developing appropriate approaches and responsive financial products. The paper uses a Case Study of WWB's work with ADOPEM Bank in the Dominican Republic to illustrate each step and key concept.

Author Women's World Banking - Hans Dellien and Elizabeth Lynch
Primary Language English (en)
Region / Country Global
Keywords Rural Finance, Agricultural Finance, Risk Assessment, Case Studies
Related Resources
Guaranteed Loans to Microfinance Institutions: How Do They Add Value? Paper 2007

view page
This resource appears in: Financial management

This Focus Note looks at recent experience with guarantees of commercial loans to microfinance institutions (MFIs). Such loan guarantees are a form of insurance that covers a lender – typically a commercial bank – against default on its loan to an MFI. If the MFi defaults, the guarantor pays the bank the guaranteed portion of the loan. The MFI pays for this insurance in order to get a loan from a bank that will not lend without some additional security for payment.

This Focus Note discusses the results of a study that draws on data provided by guarantee agencies, publicly available financial reporting by MFIs, and telephone and email exchanges with selected MFI managers and guarantee staff. The study itself

  • reviews the specific benefits loan guarantees are meant to produce;
  • describes guarantor agencies, transaction volumes, cost structures, and guarantee mechanisms; and
  • examines the results of a set of 96 loan guarantees issued by eight agencies and draws conclusions about the effectiveness of loan guarantees.

The paper begins by setting out key findings before discussing reasons that funders use loan guarantees and the profile of MFIs that use loan guarantees. The bulk of the paper then provides an analysis of measuring the impact of guaranteed loans to MFIs. Before remarking on factors for the future, the paper also provides a view on whether schemes are successful in that MFIs are eventually able to borrow from their local banks without a loan guarantee. A brief review of the role of guarantees in international lending to MFIs and the sustainability of guarantee agencies is also offered.

The Focus Note states that its central observation is that loan guarantees are superior to a direct loan from an international donor or funder only if the guaranteed loan helps the MFI build a competitive funding structure. The conclusion also follows that guarantors will realise their greatest potential by focusing on lenders that use guarantees to structure loans to MFIs in conditions that are competitive with other funding options. In this role, the paper suggests, guarantee facilities could become specialised, permanent, and possibly profitable components of an emerging MFI funding industry.

CGAP Reflections on the Compartamos Initial Public Offering Case Study 2007

view page
This resource appears in: Financial management

On April 20, 2007, Banco Compartamos, a microfinance institution (MFI) that was launched in 1990 and originally funded by grants from various sources, including CGAP, completed a landmark initial public offering (IPO) of its stock. The IPO was 13 times oversubscribed and considered a huge success by any financial market standard. Pent-up demand caused the share price—representing 30 percent ownership in the bank—to surge 22 percent in the first day of trading. Demand was driven by the exceptional growth and profitability of Compartamos, a dearth of Mexican investments for emerging market portfolios, rarity value, strong management, and the appeal of microfinance.

The spectacular success of the IPO was a milestone not only for Compartamos, but for microfinance. Mainstream international fund managers and other truly commercial investors—not socially responsible investors—bought most of the shares. The transaction will probably give a significant boost to the credibility of microfinance in commercial capital markets and accelerate the mobilization of private capital for the business of providing financial services to poor and low-income people. However, the Compartamos offering has raised serious issues for many in the microfinance field and beyond, especially in view of the huge profits that it produced for Compartamos shareholders.

This paper focuses on three questions:

  • Was the aid money that was granted to Compartamos in its early years used inappropriately to enrich private investors?
  • Are Compartamos’ exceptional profits, and the high interest rates they are built on, defensible in light of the social bottom line that the company identifies as part of its purpose, and consistent with the development objectives of its principal shareholders?
  • Does the IPO alter the governance of Compartamos in ways that will make it harder for the company to balance social and commercial objectives, especially when there are choices to be made about whether money goes into shareholders’ pockets or clients’ pockets?

Rich Rosenberg concludes that the public aid money given to Compartamos has not been inappropriately diverted to private pockets. He also thinks that the Compartamos decision to grow fast was defensible from a development point of view but he questions the way that growth was funded. Apparently Compartamos and its shareholders say that unusually high profits were a necessary part of the equation: “[t]he returns received have become retained earnings and allowed the institution to nearly double its reach over the last three years, something it could not have done any other way." Rich disagrees. The years since 2000 have seen what can only be described as a flood of new publicly owned or socially motivated investors –”international financial institutions” (IFIs) and “microfinance investment vehicles” (MIVs)—who are anxious to invest large amounts in debt and equity of MFIs. Thus Compartamos could easily have raised funds for growth from additional borrowing, particularly as it was not heavily leveraged at all.

The Compartamos affair thus becomes one of governance. Rosenberg says "it is hard to avoid serious questions about whether Compartamos’ interest rate policy and funding decisions gave appropriate weight to its clients’ interests when they conflicted with the financial and other interests of the shareholders". He goes on to observe: "One needs to be realistic about commercialization of microfinance. Although it brings the advantage of access to much greater funding and allows exponential expansion in the number of people served, one cannot be too shocked if a for-profit corporation starts acting like other businesses. But in the Compartamos case, a controlling majority—two thirds of the shares—was held by three pro-bono shareholders who were committed to development objectives, not profits. At a minimum, one wants to ask why they did not insist that greater weight be given to the interests of Compartamos’ clients."

A hot debate raged on this topic in both DevFinance and the Microfinance Practice discussion lists. Dave Richardson of WOCCU provided a great deal of additional analysis and critique - his key posts are provided here for ease of reference, plus one from Roy Mersland.

Author Rosenberg, R.
Publisher CGAP
Number of Pages 23 pp.
Primary Language English (en)
Region / Country Global
Keywords Income Sources, Microfinance Institutions, Governance
Related Resources
Loan Portfolio Management: advice from the MFP Document 2007

view page
This resource appears in: Financial management

Advices from contributors to the Microfinance Practice discussion list in response to the question: I am looking for a system to manage a microfinance loan portfolio. Any recommendations?

Primary Language English (en)
Region / Country Global
Keywords Management Information Systems (Mis), Loan Portfolio Management, Mfi Management
Related Resources
Financing Rural Finance Institutions in Mexico Paper 2007

view page
This resource appears in: Financial management

This paper begins by highlighting the significant development challenge of financing rural enterprise. It notes the difficulties resulting from relatively high transaction costs, volatile agricultural commodity markets and poor infrastructure that contribute to the development of inefficient rural financial systems to the detriment of all business activity, but in particular to low income, small and medium enterprises. The paper does note, however, that unlike many developing countries, Mexico has relatively deep and sophisticated financial markets, strong savings instincts, and a plethora of financial institutions operating in rural and semi-rural areas. Nevertheless, despite the presence of financial institutions in rural Mexico, the demand for financial products and services - especially by small rural enterprises - remains largely unmet. While there has been much public sector bank and government financial support to rural areas, most of it has favoured large rural enterprises (e.g., commercial farms, processors, wholesalers, or exporters) over small enterprises. These initiatives have also been heavily subsidised and poorly managed, creating a culture of non-repayment. This has resulted in limited sustainable access to appropriate financing for small and micro rural enterprises.

The paper suggests that the advent of microfinance and increasing pressures on state banks for demand driven and sustainable programs is beginning to erode this culture. While rural financial markets remain far from efficient, advances in banking technology, risk management methodologies, and competitive pressure among private financial institutions have encouraged some interest in rural financial markets. Small, non-collateralised working capital loans to off-farm enterprises, for example, are proving to be profitable in high to medium density rural areas. Short-term, crop lending is also relatively low risk and profitable. However, medium term, non-working capital loans to low income farmers or entrepreneurs in rural areas still remains the frontier of rural finance as are long-term production loans (e.g., orchards, water and soil conservation or management, etc.).

This paper discusses the similarly difficult issue of financing RFIs that serve these markets, focusing on Mexico. It notes that whilst many would prefer to fund themselves through deposits, very few achieve this, and where deposits may be significant enough for financing, their contract structure is often one year or less and so financing medium or long-term assets remains a critical challenge in rural areas where the need for long-term loans is structurally very strong. As a result, the paper reports that most RFIs rely to varying degrees on state bank finance, much of which is available over the medium term (two to five years). This is better than short-term finance, but it does not resolve matching problems for longer term lending required for many agricultural needs. Collateral requirements from state banks can also complicate access to long-term funding unless RFIs have solid and liquid collateral (i.e., not a loan portfolio).

After analysing how a sample of Mexican RFIs source their portfolio funding the paper discusses strategic considerations for RFI financing and looks at deposits, term deposits, international funds, access to capital markets, structured finance instruments and securitisations.

The paper then elaborates on how financing success lies in strategy and concludes with the view that examples from around the world show how concerted and dedicated finance strategies can improve an institution’s long-term funding base, contributing to profitable and scalable rural financial institutions.

Healthy Women, Healthy Business: A Comparative Study of Pro Mujer’s Integration of Microfinance and Health Services Report 2006

view page
This resource appears in: Financial management

Conventional wisdom among industry specialists is that microfinance institutions (MFIs) should specialize in financial services, leaving non-financial and human development services to other types of institutions. The logic behind this argument concerns financial self-sufficiency, as well as the dangers of overextending management and staff and diverting attention from an MFI’s core financial business. The argument assumes limited institutional capacity, the need for specialization, and the inability of human development services to cover their costs. While some microfinance institutions have provided financial and non-financial services successfully for a number of years, few have been able to convince the mainstream microfinance industry that they can offer both types of services effectively and on a sustainable basis.

This study grew out of Pro Mujer’s desire to more clearly understand and demonstrate the effectiveness and sustainability of its integrated microfinance and health services. It is based on data gathered in spring 2005. Pro Mujer is an international microfinance and women’s development organization originally founded in Bolivia. It has since expanded by creating four additional MFIs in Peru, Nicaragua, Mexico and Argentina, as well as a network support office, Pro Mujer International (PMI), in New York.

Pro Mujer operations began in Bolivia with a program that trained women’s groups in maternal-child health. The institution later introduced microfinance services, which became its central product line. Yet Pro Mujer realized that client health problems often led to problems with loan repayment, driving the institution to search for ways to integrate health interventions and financial services. After studying alternative methodologies for offering “one-stop” services to its clients, Pro Mujer decided to focus its health services on health education, primary preventive and curative healthcare. These services would be provided through health clinics established at existing Pro Mujer focal centers. After eight years of experimentation, Pro Mujer fully developed and rolled out its microfinance plus health service model. The demand for these services and their impact on clients led Pro Mujer to incorporate health services as a core MFI service and to formally include healthcare in its organizational mission.

Now three Pro Mujer MFIs currently offer a full range of microfinance and health services, as well as other human development services. While certain core characteristics define the Pro Mujer model, the organization has allowed its service delivery strategy to be adapted to local conditions in each country. This flexibility has led to three variations of direct and indirect service provision, which provide a basis for analyzing how different intervention strategies affect different outcomes, such as client satisfaction, development impact and financial performance. The study first examines the similarities and differences between health service strategies among the three MFIs and assesses how their clients and partners evaluate the benefits of these services. It then measures the financial performance of each model by segregating direct and indirect costs attributable to each service and assigning them in a systematic manner.

The study shows that Pro Mujer clients value the financial and health services that they receive. It also demonstrates that clients have improved their health knowledge and practices, and that they have better access to health services. Offering multiple services leverages Pro Mujer’s existing infrastructure, improves client loyalty and strengthens its competitive position in financial service markets. However, offering both financial and health services requires significant institutional capacity because the two programs have different management requirements.

The cost allocation exercise undertaken by this study provided Pro Mujer with detailed information to help manage its integrated services. Previously, Pro Mujer only allocated direct program costs to its health services. However, this practice simultaneously undervalued the operational self-sufficiency of its financial services and overvalued that of its health services. Following the exercise, Pro Mujer discovered that its health services could reach 142 percent cost coverage on the basis of earned income and donations, and up to 80 percent on the basis of earned income alone. The cost allocation also allowed Pro Mujer to calculate the full cost of its health services for the first time, which currently ranges from US$2 to US$9 dollars per client per year. The study concludes that integrated service models can have a positive and sustainable impact, but identifies a number of prerequisites and management issues that MFIs should consider before replicating an integrated service model or the attendant cost allocation exercise. Among other considerations, the feasibility of replication is determined by the commitment of management, institutional capacity, client demand and the operating environment.

This study is a valuable contribution to the difficult question of whether or not institutions can combine the delivery of financial and non-financial services in developing countries. It clearly illustrates the importance of developing a cost accounting methodology and provides a useful summary of advantages and drawbacks of different strategies. It is a highly recommended read for practitioners.

Author Junkin, R.; Berry, J.; Pérez, M.E.
Publisher Pro Mujer
Number of Pages 50 pp.
Primary Language English (en)
Region / Country Global
Keywords Credit Plus Approaches, Health Education, Agricultural Microfinance, Financial Institution
Related Resources
Improving MFI Performance in Competitive and Saturated Environment Paper 2006

view page
This resource appears in: Financial management

The paper suggests that the profitability rationale (the establishment of commercial, profit-making microfinance models) has led to an increase in the number of sustainable MFIs and has often driven the same microfinance institutions towards more easily-accessible economic activities and zones in order to limit operational expenses. It notes that rural zones in particular have been neglected for urban areas where operational expenses are lower.

It is argued that this is especially true as a high concentration of competition in some geographic zones and in a number of countries has led to a gradual observation that the diversity of MFI programmes in very competitive markets yields both positive effects (low interest rates, diversification of offer, proximity, etc) and negative effects (higher risk, overindebtedness, occasional unfair competition and profit search geared towards profitable clients).

An environment is said to be saturated and competitive according to a number of factors. These include the presence of many MFIs in one geographic zone, a range of financial services for local microentrepreneurs, MFIs difficulty in accessing new clients or retaining existing ones (high desertion rate), competition between MFIs for new clients, clients committing to multiple MFIs, etc. There are a number of indicators, but the paper points out that the central point is that in such an environment , the offer of financial services, especially loans, is higher than the actual microentrepreneurs’ demand.

In setting out how the performance of MFIs can be improved in a competitive and saturated environment, this paper is based around the following 4 main topics:

  • Ensuring fair competition
  • Controlling the effects of competition on the interest rates
  • Avoiding cross indebtedness: the cause of overindebtedness
  • The consequences of regulation: implementing a suitable legal context
Toolkit for Loan Portfolio Audit of Micro Finance Institutions Toolkit 2006

view page
This resource appears in: Financial management

This publication provides a best practices toolkit for microfinance institutions on how to conduct a loan portfolio audit. The authors begin from the premise that the loan portfolio is the primary income generating asset for an MFI – note that here the term MFI is broadly used and includes Micro Finance Institutions, Commercial Banks, Non Banking Finance Companies / Institutions, Cooperatives / Credit Unions and other such entities involved in delivering financial services to low income people – and it is most commonly subject to material mistakes. Most MFI failures stem from the deterioration in the quality of the loan portfolio. An assessment of the risks and inadequacies inherent in an MFI’s portfolio therefore assumes tremendous importance and this is the most important objective of a “loan portfolio audit”.

The authors highlight that MFI credit (lending) operations have unique characteristics that portfolio auditors must first understand. The point to several aspects that need special attention, which inckude:

  • Difficulty in maintaining portfolio information
  • Decentralization could cause deviation from prescribed credit policy and result in fraud, error or manipulation
  • Mandate of efficiency may result in lesser controls/procedures/information/supervision
  • Burgeoning growth of portfolio could result in failures of established systems
  • Restructuring (rescheduling and refinancing) of delinquent loans is an often-used strategy to camouflage portfolio quality
  • Weak information systems may not even permit MFIs to recognize delinquency

It is noted that the audit of loan assets of an MFI’s portfolio, would include, an audit of the systems and procedures and associated lending internal controls as well. Thus, it will not only provide essential feedback with a view to safeguard the MFI’s primary asset - the loans to its members – but more importantly, it should also enable stakeholders to understand the risks inherent in the MFI’s loan portfolio and systems/ procedures used to mitigate this risk. This information could prove useful in two ways: (1) facilitate prudent decisions regarding investing in the MFI (either directly or indirectly); and more importantly, (2) help isolate specific areas for capacity building and technical assistance for enhancing the portfolio quality of the MFI.

This portfolio audit tool is structured and set out to answer the following questions:

  • How to conduct a loan portfolio audit?
  • What are the key portfolio audit procedures to be performed?
  • Is there a checklist of what to do?
  • How to audit record keeping?
  • How to review loan policies?
  • How to determine the loan sample?
  • How to document the review?
  • How to learn about the MFI’s system of internal controls over the lending activity?
  • What are the key considerations in reviewing internal controls over the lending function?, and
  • Many other (such) questions related to the loan portfolio audit in the context of microfinance.

Following the introduction, the next section outlines the basic methodology in terms of how to structure the loan portfolio audit. The third section describes the checklist and tool, which has been generated after extensive field-testing among 6 branches of 2 large MFIs and 3 branches of 2 commercial banks in South Asia/India. These checklist items correspond to the various steps given in Figure 1 in the methodology section. An Excel Rating Sheet, operationalising this check list has also been included.

The last section is the appendix which provides explanatory notes to technical aspects such as best practices format of the portfolio report and procedure for generating this report, best practices definitions and interpretations of key portfolio management indicators along with sample calculations, best practices methods for ageing of over due (past due) loans in an MFI’s portfolio, summary of key accounting process and transactions for loan portfolio management and glossary of key financial terms for loan portfolio management.

Author Graham A.N. Wright, Ramesh S Arunachalam, Manoj Sharma and Madhurantika Moulick
Publisher MicroSave
Number of Pages 246 pp.
Primary Language English (en)
Region / Country Global
Keywords Portfolio, Auditing, Bank Loans
Related Resources
Microfinance Institutions and Foreign Exchange Risk: The Experience of ACCION’s Latin American Affiliates Paper 2006

view page
This resource appears in: Financial management

This short paper notes at the outset that some observers have suggested that many microfinance institutions are now acquiring resources in foreign currency, without understanding or effectively managing the risks. The paper aims to explore the following questions in relation to this comment:

  • How great a threat does exposure to foreign exchange rate risk represent to microfinance institutions (MFIs)?
  • What motivates MFIs to acquire liabilities in a foreign currency?
  • Do MFIs understand the exchange rate risk involved, and if so, how do they manage them?

The paper presents the results of ACCION International’s survey of it Latin American affiliates on these questions. The survey found that the majority of ACCION affiliates do not have exposure to foreign exchange rate risk, because they do not have foreign currency debt. Those institutions with foreign exchange risk were employing effective mechanisms to manage that risk.

The following areas are discussed:

  • What is foreign exchange rate risk?
  • The exposure of ACCION’s Latin American affiliates to foreign exchange rate risk
  • The decision to acquire foreign currency debt
  • The decision to avoid foreign currency debt
  • Risk mitigation for MFIs borrowing in a foreign currency
  • The role of dollarization in mitigating foreign exchange rate risk
Innovations in Reducing Costs and Enhancing Productivity: Field Treasury Systems Paper 2006

view page
This resource appears in: Financial management

Various factors determine the sustainability of a financial institution. These include pricing of the product, costs of funds, administrative overheads, loan losses or portfolio quality, and inflation. Each determinant has its own significance and can be controlled in different ways. Pricing of the services primarily reflects the long-term vision of the institution and is set at a level by the management. Cost of funds is usually driven by the sources of funds an MFI has, along with the internal fund management procedures. Administrative costs are driven by the operational structure and productivity of the program. Needless to say, credit risk determines the level of portfolio quality, which the institution carries in its balance sheet. The right balance between all the above factors is critical to making an MFI sustainable.

This paper is focused on internal factors that contribute to increased cost of funds and the innovations the Kashf Foundation in Pakistan employed to lower these costs. The internal factor that drives the cost of funds is the process through which an MFI oversees the fund management within the organization. An effective system of internal fund management ensures the lowest levels of idle funds at any given point in time, thus lowering the costs of overall funds employed in the system. The funds can be accumulated as idle funds in the system for various reasons, ranging from operational inefficiencies, like lags in disbursements, to inadequate procedures deployed by the MFI.

The case study of Kashf Foundation traces the varying decisions that were taken over a number of years with regard to fund management and describes the outcomes and lessons learned. It may be helpful to other institutions to read this and see what conclusions they can draw for their own financial management methods.

Sound credit risk assessment and valuation for loans Guideline 2006

view page
This resource appears in: Financial management

This paper is intended to provide banks and supervisors with guidance on sound credit risk assessment and valuation policies and practices for loans regardless of the accounting framework applied. As such, the principles in this paper are intended to be consistent with those set forth in the International Financial Reporting Standards (IFRS) applicable to loan impairment. Specifically, the paper addresses how common data and processes may be used for credit risk assessment, accounting and capital adequacy purposes and highlights provisioning concepts that are consistent in prudential and accounting frameworks. This guidance focuses on policies and practices that the Basel Committee on Banking Supervision2 believes will promote sound credit risk assessment and controls.

This supervisory guidance is structured around ten principles:

  1. A bank’s board of directors and senior management are responsible for ensuring that the bank has appropriate credit risk assessment processes and effective internal controls
  2. A bank should have a system in place to reliably classify loans on the basis of credit risk.
  3. A bank’s policies should appropriately address validation of any internal credit risk assessment models.
  4. A bank should adopt and document a sound loan loss methodology.
  5. A bank’s aggregate amount of individual and collectively assessed loan loss provisions should be adequate to absorb estimated credit losses in the loan portfolio.
  6. A bank’s use of experienced credit judgement and reasonable estimates are an essential part of the recognition and measurement of loan losses.
  7. A bank’s credit risk assessment process for loans should provide the bank with the necessary tools, procedures and observable data to use for assessing credit risk, accounting for loan impairment and determining regulatory capital requirements.
  8. Banking supervisors should periodically evaluate the effectiveness of a bank’s credit risk policies and practices for assessing loan quality.
  9. Banking supervisors should be satisfied that the methods employed by a bank to calculate loan loss provisions produce a reasonable and prudent measurement of estimated credit losses in the loan portfolio that are recognised in a timely manner.
  10. Banking supervisors should consider credit risk assessment and valuation policies and practices when assessing a bank’s capital adequacy.

Some of these principles have been abbreviated - you shoould refer to the whole document for complete information.

Author Basel Committee on Banking Supervision
Publisher Bank for International Settlements
Number of Pages 26 pp.
Primary Language English (en)
Region / Country Global
Keywords Risk Assessment, Portfolio Quality, Capital Adequacy
Related Resources
The Art and Science of Pricing Financial Services Paper 2006

view page
This resource appears in: Financial management

This paper suggests that pricing financial services is both an art and a science. It argues that the “art” of pricing is in choosing a combination of fees and charges acceptable to customers, that are fair and transparent, and in determining if the product has any unique attributes that deserve premium pricing. The “art” of pricing is in careful and considered communication to and feedback from customers and staff to ensure that pricing messages are appropriately and correctly delivered. The “science” of pricing is in ensuring that the product is profitable and is competitive in the market, that aside from very few specific and chosen loss leaders, that each product returns a profit.

This short paper briefly examines pricing from the customer perspective to examine how important price is as a determinant of customers’ choices and why prices of financial services are so difficult for users to understand. It considers the pricing implications of the evolution of “traditional” microfinance to a more “market led” approach – looking at competition efficiency and product diversification.

The paper then reflects on theory and practice, with an emphasis on the later, in particular the significance of transparency and mechanisms and policies to improve transparency of pricing – more specifically it discusses pricing objectives, pricing as a marketing strategy and using price as a differentiator. A simple, but effective pricing methodology is also introduced that considers the cost of provision, the charges of competing products and the value of the product to customers.

The paper ends with consideration of factors relevant for pricing different types of financial services, including savings, loans and e-banking products. It concludes that in concept product pricing is simple, firstly, establish cost, secondly examine the fees charged by the competition and finally determine whether the product or service has sufficient customer value to deserve a premium price. In practice, pricing is complex, customers and institutions alike find it difficult to track prices regularly and to understand the nuances of pricing calculations. There is a role for regulators in promoting transparency, but a less clear role in setting interest rate ceilings as these can act to restrict the supply of credit. Finally, where possible, pricing should reflect levels of risk and not be an avenue for excessive returns or to cover for inefficiencies in delivery of services.

Author Cracknell, D and Messan H
Publisher MicroSave
Number of Pages 21 pp.
Primary Language English (en)
Region / Country Global
Keywords Pricing, Products, Profitability
Related Resources
Toolkit for Loan Portfolio Audit of Micro Finance Institutions Toolkit 2006

view page
This resource appears in: Financial management

This publication provides a best practices toolkit for microfinance institutions on how to conduct a loan portfolio audit. The authors begin from the premise that the loan portfolio is the primary income generating asset for an MFI – note that here the term MFI is broadly used and includes Micro Finance Institutions, Commercial Banks, Non Banking Finance Companies / Institutions, Cooperatives / Credit Unions and other such entities involved in delivering financial services to low income people – and it is most commonly subject to material mistakes. Most MFI failures stem from the deterioration in the quality of the loan portfolio. An assessment of the risks and inadequacies inherent in an MFI’s portfolio therefore assumes tremendous importance and this is the most important objective of a “loan portfolio audit”.

The authors highlight that MFI credit (lending) operations have unique characteristics that portfolio auditors must first understand. The point to several aspects that need special attention, which inckude:

  • Difficulty in maintaining portfolio information
  • Decentralization could cause deviation from prescribed credit policy and result in fraud, error or manipulation
  • Mandate of efficiency may result in lesser controls/procedures/information/supervision
  • Burgeoning growth of portfolio could result in failures of established systems
  • Restructuring (rescheduling and refinancing) of delinquent loans is an often-used strategy to camouflage portfolio quality
  • Weak information systems may not even permit MFIs to recognize delinquency

It is noted that the audit of loan assets of an MFI’s portfolio, would include, an audit of the systems and procedures and associated lending internal controls as well. Thus, it will not only provide essential feedback with a view to safeguard the MFI’s primary asset - the loans to its members – but more importantly, it should also enable stakeholders to understand the risks inherent in the MFI’s loan portfolio and systems/ procedures used to mitigate this risk. This information could prove useful in two ways: (1) facilitate prudent decisions regarding investing in the MFI (either directly or indirectly); and more importantly, (2) help isolate specific areas for capacity building and technical assistance for enhancing the portfolio quality of the MFI.

This portfolio audit tool is structured and set out to answer the following questions:

  • How to conduct a loan portfolio audit?
  • What are the key portfolio audit procedures to be performed?
  • Is there a checklist of what to do?
  • How to audit record keeping?
  • How to review loan policies?
  • How to determine the loan sample?
  • How to document the review?
  • How to learn about the MFI’s system of internal controls over the lending activity?
  • What are the key considerations in reviewing internal controls over the lending function?, and
  • Many other (such) questions related to the loan portfolio audit in the context of microfinance.

Following the introduction, the next section outlines the basic methodology in terms of how to structure the loan portfolio audit. The third section describes the checklist and tool, which has been generated after extensive field-testing among 6 branches of 2 large MFIs and 3 branches of 2 commercial banks in South Asia/India. These checklist items correspond to the various steps given in Figure 1 in the methodology section. An Excel Rating Sheet, operationalising this check list has also been included.

The last section is the appendix which provides explanatory notes to technical aspects such as best practices format of the portfolio report and procedure for generating this report, best practices definitions and interpretations of key portfolio management indicators along with sample calculations, best practices methods for ageing of over due (past due) loans in an MFI’s portfolio, summary of key accounting process and transactions for loan portfolio management and glossary of key financial terms for loan portfolio management.

Author Graham A.N. Wright, Ramesh S Arunachalam, Manoj Sharma and Madhurantika Moulick
Publisher MicroSave
Number of Pages 246 pp.
Primary Language English (en)
Region / Country Global
Keywords Portfolio, Auditing, Bank Loans
Related Resources
Who Will Buy Our Paper: Microfinance Cracking the Capital Markets Paper 2006

view page
This resource appears in: Financial management

This paper begins by stating that microfinance needs capital to achieve its goal of serving the millions of people who lack access to financial services. It sets out the following questions:

  • As microfinance matures, will investments in microfinance gain mainstream acceptance in the financial markets?
  • If so, who will buy these investments?
  • Does it make sense to think that microfinance could become a new asset class on Wall Street?

On February 5 and 6, 2006, ACCION International, Corporación Andina de Fomento (CAF) and Deutsche Bank sponsored a conference in New York together with partner Developing World Markets that brought together fund managers, investment intermediaries and microfinance practitioners to consider these questions. The objectives of this conference were to inform the capital markets of the type of offerings microfinance provides and to identify the challenges that remain. This InSight discusses the main themes of the conference. It describes successful cases of debt and equity financing in microfinance, at both the local and international levels. This report also discusses constraints and opportunities for the microfinance industry as it continues to move towards the capital markets.

The paper concludes by suggesting that not so long ago, the microfinance community was asking, “Will investors buy microfinance commercial paper?” It states that instead, it is now clear that microfinance institutions are successfully accessing the capital markets and the discussion has moved to “Who will buy our commercial paper and how?” Experiences presented at the conference suggest that the main sphere of activity in microfinance occurs in local markets. Investments in local markets may need initial credit enhancements to make local investors familiar with microfinance, but after the microfinance institution establishes a track record, the need for the credit enhancement falls away. International investments have proved to be more difficult, with country-specific regulatory policies and potential exposure to foreign exchange rate risk. However, many innovative examples, particularly in the realm of international debt financing, have contributed to the evolution of the industry. The microfinance industry still has many constraints to overcome before it is to take its place as a true asset class. However, socially responsible investors will smooth the way to mainstream investment, absorbing many of the costs of building the industry.

Equity & Leverage in Indian MFIs Technical Note 2005

view page
This resource appears in: Financial management

The purpose of this technical note is to provide a practical understanding of the need for equity to improve the resource position of MFIs and its impact on prudential operations. It is also an extremely useful short document which explains capital adequacy ratios, leverage and risk weighting quite clearly.

Leverage is the use of fixed rate financial instruments (usually debt) to raise additional capital to magnify the potential return on equity. Leverage is used when the ability of a business to generate return on investments is higher than the cost of debt used to finance those investments. While financial leverage can magnify return on investments, it can also harm an enterprise if the return is lower than the cost of borrowings. The extent of this effect depends on the proportion of the investment in the enterprise that is financed with debt; a higher level of debt implies higher leverage and, consequently, higher magnification of return (or loss) on equity.

Central banks of countries specify what is to be included in the total capital of financial enterprises and what is to be included in capital assets as well as their level of risk (risk weight). Typically in the case of MFIs, capital includes share capital (paid in equity) where applicable, donor grants (donor equity), accumulated profits (or losses) and a proportion (25-50%) of long term sub-ordinated debt. Risk weights for assets typically include 100% risk on loan portfolio, around 50% on bank deposits and net fixed assets, and zero risk on cash holdings.

In India, commercial, cooperative and local area banks are required by the Reserve Bank of India to maintain a minimum capital adequacy ratio of 9%, while the minimum capital adequacy for non-bank finance companies (NBFCs) is 12% if they do not accept public deposits and 15% if they accept public deposits. Looking at the distribution of CARs for Indian MFIs, it is only in the smallest institutions that average capital adequacy is reasonable – usually on account of the predominance of donor grants in the balance sheet. Only 4 of the 8 largest MFIs have CAR in excess of 12%. Thus a substantial proportion of Indian MFIs have become over-leveraged.

Data presented in this technical note show that paid-in equity (or share capital from investors) is still a relatively small proportion of the total capital of MFIs, amounting to less than 25% for medium and small MFIs. Only 23 of the 110 MFIs studied have generated sufficient profits to contribute to their capital from internal accruals. Furthermore, as the level of net grants (total donor equity less accumulated losses) declines with MFI size, the extent of financial liabilities (deposits + debt) rises. Thus, the largest Indian MFIs have nearly 90% of funds as financial liabilities implying debt-equity ratios of the order of 9:1 and a very high level of risk for lenders.

The note goes on to discuss the effect of various factors on the financial leverage of MFIs in India, such as the profile of promoters, the size and growth rate of the MFI, the robustness of the business plan and the legal form of the MFI. It also observes that the lack of a market for MFI equity has led to the development of innovative instruments for investment in microfinance including securitisation, subordinated debt and the partnership model where a commercial bank contracts the MFI to offer microcredit services on its behalf.

Author M-Cril
Publisher Micro-Credit Ratings International Limited
Number of Pages 7 pp.
Primary Language English (en)
Region / Country Global
Keywords Capital Adequacy, Leverage, Equity Funds
Related Resources
The Market for Foreign Investment in Microfinance: Opportunities and Challenges Paper 2005

view page
This resource appears in: Financial management

This paper begins by highlighting that many microfinance institutions (MFIs) in developing countries have received foreign funding, especially the larger MFIs. Most of that funding has consisted of grants or highly subsidised loans from donors. CGAP estimates that in recent years, bilateral and multilateral donors have provided approximately USD0.5-1.0 billion annually in grants and soft loans for microfinance.

However, the paper also notes that since 2000 there has been a rapid growth in foreign investment by various agencies and funds that tend to be more commercially orientated. By mid-2004, this group of actors had invested a total of nearly USD1.2 billion in about 500 MFIs. The authors note that the equity, loans, and guarantees that they offer to MFIs are typically less subsidised than grants and loans from traditional donors.

These “foreign investors” and the demand for their services are the subject of this paper. It surveys the market and attempts to address some key questions:

  • How much foreign investment in MFIs is really private?
  • How much of this investment is really commercial?
  • Where is the investment being placed, in terms of region, number, and type of MFIs?
  • Are investors competing for MFIs to invest in?
  • As MFIs continue to grow and absorb more funding, what is the likely role of foreign investment compared with domestic sources in the MFIs’ own countries?
  • Does foreign debt create inappropriate currency rrisk for MFIs?
  • What practical lessons emerge from the analysis?

In this paper, the term “microfinance institution” includes NGOs, cooperatives, banks, and licensed non-bank institutions that focus on delivering financial services to microentrepreneurs and other low-income clients, generally using lending techniques that have been developed during the last 25 years.

Accounting Software: Integrated or Separate Packages? Editors Note 2005

view page
This resource appears in: Financial management

Many financial institutions are faced with a choice over which software packages to implement. One such challenge relates to choosing accounting software and savings and loan tracking software. More specifically the challenge relates to whether a fully integrated package that can handle both areas at once is a preferable option to implementing two separate packages that are seamlessly interfaced.

Norman Arsenault points to the virtues of the separate package approach, stressing advantages in the areas of fuller-features, ease of implementation and better management, amongst others. Conversely, Signis Aliks argues the case for the fully integrated package, suggesting more consistent data, easier support and maintenance and ease of upgrade as some of the key advantages. The download highlights the main arguments made from a lively debate posted on Devfinance.

Author Arsenault, N. and Aliks, S.
Primary Language English (en)
Region / Country Global
Keywords Management Information Systems (Mis), Cost Accounting
Related Resources
Due Diligence Guidelines for the Review of Microcredit Loan Portfolios: A Tiered Approach Guideline 2005

view page
This resource appears in: Financial management

MFIs, as presently constituted, can be quite risky propositions for investors. And, external audits, ratings, and evaluations generally fail to accurately quantify the primary risk facing those investors—that of misrepresentation of microcredit portfolio quality. The Loan Portfolio Review Tool has been designed to evaluate the accuracy of reported levels of repayment and the extent to which the MFI employs sound loan management practices. The tool has been designed around three, gradually deepening, levels of review that provide the user with ever-increasing degrees of certainty about the underlying quality of loan portfolios, regardless of how they are being reported. As such, it is flexible enough for a variety of uses and different requirements for confidence levels about reported loan portfolio quality. The portfolio review is a unique, powerful, and relevant tool designed for use by the lay-person, and does not require specialized audit or financial analysis skills. Portfolio reviews are not only critical for management, but also for regulators and the growing number of commercial investors in microfinance.

  • Tier I is a two-day field review by one analyst who meets with senior management at the head office of an MFI to assess credit policies and general documentation. This level is recommended for donor agency staff who are considering making a small grant.
  • Tier II is a two to five-day field review by one or two analysts, conducted at the branch level. It entails a qualitative assessment of credit policies, procedures, and practices, and a verification of management information system (MIS) reports. This level is recommended for appraisals, audits, and ratings related to sizeable grants or investments in an MFI.
  • Tier III is a two to four-week review by a team of local auditors to evaluate, measure, and quantify asset quality through statistical sampling and detailed analysis. This level is recommended for equity investors and regulators concerned with the soundness of an institution.

Tiers I and II can be undertaken by staff of donor agencies, microfinance promoters, and investment funds, while Tier III is sufficiently technical that those commissioning such a review might want to contract an audit firm or other organization offering the sampling skills necessary to achieve the degree of statistical representation required. Tier III can be undertaken by generalists, without a high level of statistical skills. It is not difficult, but the commissioner would risk the analysis not being statistically significant to the highest degree (although, in many cases, this level of sophistication may not actually be required). The appendix includes terms of reference for an audit firm that would guide them in the completion of a due-diligence exercise (all three tiers) and details the nature of the expected reports and opinions.

Author Christen, R.P
Publisher CGAP
Number of Pages 39 pp.
Primary Language English (en)
Region / Country Global
Keywords Auditing, Portfolio, Repayment Risk
Related Resources
Interest Rates - Key Concepts and Definitions Document 2005

view page
This resource appears in: Financial management

This Editor's Note contains a quick reference guide to interest rate terminology and definitions.

Tapping the Financial Markets for Microfinance Paper 2005

view page
This resource appears in: Financial management

This Grameen Foundation USA paper explores the opportunities and challenges microfinance institutions face in tapping into capital markets to finance their growth. The microfinance industry’s outreach and impact on world poverty continues to develop, and now more than 60 million poor families are benefiting from its services internationally, around US$4 billion in total. However, relative to the demand for these services, estimated to be more than US$300 billion, the potential of microfinance remains unattained. This capital shortfall is far beyond the scope of current donor funding, and can only realistically be met by major capital markets.

This paper explores a host of ways that capital investors can effectively and profitably work in the field of microenterprise, and demonstrates where there has already been initial interest by the financial markets in microfinance. Investment in this area is likely to grow because:

  • Professionally managed profitable microfinance institutions (MFIs) are emerging from the sector.
  • Evidence shows that MFIs serving the poorest are most cost-efficient and have the highest portfolio quality.
  • Evidence suggests that the poverty level of customers does not impact the profitability of the MFIs.

The paper concludes that in the long term, MFIs should be financing themselves exclusively from commercial sources, through the financial markets. Organisations such as the Grameen Foundation USA, and the international donor community need to play a more proactive role in developing financial products that may help MFIs to access commercial markets and improve outreach. Only through these types of initiative, can the gap between demand for, and supply of, financial services to the poor be overcome.

MFI Factsheet Document 2005

view page
This resource appears in: Financial management

The MFI Factsheet is a reporting format that can be used both internally by managers of the MFI, and externally for purposes of analysis and monitoring. The authors note that it is fully compliant with best practices of the microfinance industry and simple to use.

It is based on accounting data and other institutional data of the MFI, to provide a set of indicators that cover most of the critical areas of a MFI. A graphical component containing 10 different graphs enhances the usability of the MFI Factsheet for analytical purposes.

  • What is it? The MFI Factsheet is an excel workbook containing 5 visible sheets and a number of hidden sheets. Together the five visible sheets provide a easy to use tool for monitoring the financial performance of an MFI, consisting of tables and graphs.
  • For microfinance? The MFI Factsheet uses to the highest possible extent terms and definitions on which consensus exists within the microfinance industry. Still, as there is no complete standardisation across the industry, some terms and definitions may differ from the ones used at any particular level or location.
  • Language options? The MFI Factsheet currently functions in 3 languages, English, French and Spanish. At any time the user can switch from one language to another, by choosing the selected language from the drop-down box, placed at the top of all the sheets.
  • Easy to use? Every item on the sheets has an item reference (e.g. A10). Many items have accompanying explanations which will appear in a pop-up window when double clicking on the item reference.
  • Will it take up lots of time? Data entry in the MFI Factsheet is straightforward and easy to perform by anyone who has general knowledge of accounting and MFI reporting. It takes about two to three hours to set up a first report in a blank format, and as less as 15 minutes to update a report.

The factsheet contains 5 worksheets within the excel workbook. 3 are for data entry (Balance Sheet, Profit and Loss Account, and Extras) and 2 are generated automatically (Financial Ratios and Graphs).

Instructions are provided within the spreadsheet.

How to Deal with the New Rating Culture – A Practical Guide to Loan Financing for Small and Medium-Sized Enterprises Article 2005

view page
This resource appears in: Financial management

This guide, aimed at anyone concerned with financing of SMEs, begins by highlighting that banks have traditionally been the main source of funding for SMEs. In recent years, however, banks have been changing their approach to the lending business. It is noted that the evolution of risk management, alongside structural changes, has induced banks to pay more attention to measuring and managing their credit risks and their capital adequacy with respect to such risks. The resulting developments are relevant to SMEs.

Banks are looking more and more closely at the capacity of their borrowers to pay back loans. Banks’ assessments of the risks associated with loans are increasingly related to the characteristics of the individual borrower. These are summarised through the ‘rating systems’ into a ‘rating’. Banks use these systems to identify the different individual risk levels of their loans and ensure that they earn a return appropriate to the risk they take.

The guide asserts that SMEs will face more significant changes than larger corporations. It argues that SMEs will be internally assessed (or rated) more and more thoroughly by banks, even when applying for small loans. As such, SMEs are likely to encounter a widening range of credit prices and overall borrowing conditions. This guide aims at giving SMEs practical advice on how to adjust proactively to the ongoing changes in the credit process in order to benefit from the potential advantages and minimise any possible disadvantages from banks’ greater focus on risk.

The guide is divided into three chapters:

  • Chapter 1 explains the ongoing developments in the banking industry, including recent regulation, and gives some insight into how the SME lending business will evolve over time
  • Chapter 2 describes banks’ credit processes and current changes relating to them with a particular focus on what ratings are, how banks use them now and in the future
  • Chapter 3 offers SMEs a set of basic rules for dealing successfully with banks on credit matters in the evolving financing environment and illustrates the key advice with an imaginary case history
Author Comisión Europea, Dirección Gral de Empresa e Industria
Publisher European Commission
Number of Pages 52 pp.
Primary Language English (en)
Region / Country Global
Keywords Agribusiness Finance, Small And Medium Enterprises (Smes), Access To Credit, Credit Rating
Related Resources
Can a Government Loan Work for Microfinance? IFAD’s Funding of the Agricultural Cooperative Bank of Armenia Paper 2004

view page
This resource appears in: Financial management

This Donor Good Practices note provides a case study documenting how the International Fund for Agricultural Development creatively used a government loan to support the Agricultural Bank of Armenia, enabling the institution to expand in rural provinces, strengthen its capital base, and become the largest bank in Armenia.

In late 1996, the International Fund for Agricultural Development (IFAD) initiated the Northwest Agricultural Services Project (NWASP) in Armenia. The objective of the four-year project was to develop sustainable agricultural support services for 40,000 people living in three rural provinces of northwest Armenia. At about the same time, the Agricultural Cooperative Bank of Armenia found itself at a critical juncture. Founded with European Union support, the bank had been operating with moderate success for just a year and was ready to implement a strategic expansion.

The objectives of the donor and the retail institution aligned beautifully. The two organizations persuaded the Armenian Ministry of Finance to accept a creative use of an IFAD loan that made sense for a growing microfinance operation. As a result, a US $4.5 million credit line was restructured into a loan and a grant for ACBA, allowing the bank to get its footing, reach self sufficiency, and expand nationwide.

By 2000, ACBA had earned the distinction of “Bank of the Year in Armenia” from the Financial Times. As of December 2003, the bank had 32,640 customers and eight branches throughout the country - the largest geographical coverage of any bank in Armenia. Of US $21 million in its outstanding portfolio, US $8.8 million were agricultural loans. (In the rural provinces, 95 percent of ACBA’s clients are farmers.) ACBA had total assets of approximately US $31 million, total equity of approximately US $9.5 million, and a US $ 0.8 million profit for 2003.

This short paper includes a discussion on the four main reasons for the success of IFAD’s funding of ACBA – ACBA found a creative way to make the IFAD loan work for sustainable microfinance and the Government of Armenia, the priorities of IFAD and ACBA were aligned, ACBA followed commercial practices, and ACBA’s use of the cooperative structure in credit delivery, ensured high portfolio quality.

La mobilisation de l’épargne. Questions clef et pratiques universelles pour la promotion de l’épargne. Paper 2004

view page
This resource appears in: Financial management

La présente publication fournit une vue d’ensemble des divers besoins et demandes en services d’épargne des ménages á bas revenus (niveau micro), de même que de la mobilisation de l’épargne partant de la perspective d’une institution financière (niveau institutionnel) et des autorités de supervision bancaire (niveau macro) dans les pays en voie de développement et en transition.

Elle est conçue comme un outil pour les collaboratrices, collaborateurs et partenaires de la DDC, ainsi que toutes autres personnes impliquées dans la promotion des services d’épargne pour les ménages á bas revenues. Des recherche importantes et des études de cas sont fournies á la fin de chaque note pour ceux qui désireraient examiner plus en profondeur certaines informations spécifiques.

Dans le développement des chapitres le texte analyse :

  • Pourquoi et comment les ménages pauvres épargnent-ils ? Dans ce chapitre est offerte une vue d’ensemble sur les habitudes d’épargne, de décisions d’investissement et de gestion de liquidité des ménages á bas revenu.
  • Mobiliser l’épargne monétaire des ménages á bas revenu : la perspective institutionnelle. Ici ils sont résumés les potentiels et les risques pour l’institution fournissant des services d’épargne á ses clients et membres.
  • Développement de produits, diversification et innovation. Ce chapitre fournit d’abord des renseignements sur les institutions de micro finance qui offrent dèjá des services d’épargne, ensuite présente une vue d’ensemble de la grande diversité de possibles compte d’épargne. Ici il est mis en valeur le besoin d’analyser la demande potentielle et l’offre existante en service d’épargne avant de développer et mettre sur le marché un nouveau service.
  • Cadre légal et économique de la mobilisation de l’épargne. C’est le dernier chapitre qui présente des aspects importants en relation avec les conditions macroéconomiques et le cadre légal dans lequel la mobilisation de l’épargne a lieu.
Author Daunier Gardiol, I.
Publisher Direction du Développement et de la Coopération
Number of Pages 44 pp.
Primary Language English (en)
Region / Country Global
Keywords Saving Mobilization, Money Management, Financial Services
Related Resources
Profit and loss account for a financial institution Guideline 2004

view page
This resource appears in: Financial management

Using an excel spreadsheet, this guideline sets out line by line the items you should find in the income and expenditure statement of a financial institution. Each line is numbered and annotated to explain what the item is. It is easy to see exactly how the various sub-totals and totals are calculated. It is a simple and useful reference guide.

Author Planet Finance
Primary Language English (en)
Region / Country Global
Keywords Income And Expenditure Statement, Accounting Principles
Related Resources
Microfinance Product Costing Tools Toolkit 2004

view page
This resource appears in: Financial management

This paper begins by suggesting that microfinance institutions (MFIs) rarely cost their individual products to determine whether they are viable, even though each product contributes to the bottom line (positive or negative). Yet, it argues, this type of information can help MFI managers streamline processes and reduce costs.

This paper notes that costing can be a powerful tool to help managers discover the true costs of products. Better management information on products helps managers make key decisions about product design, delivery mechanisms, and pricing. A costing exercise can also raise awareness of the cost components of different products, reveal hidden costs, instill cost-consciousness in staff, and uncover excess capacity and other operational problems.

The preferred methodology in this paper is activity-based costing (ABC), which traces indirect costs in microfinance to core operational activities. The paper notes that in addition to individual product costs, ABC helps employees and management understand the processes and activities they perform, as well as the costs of each process. The paper also describes it as a potent tool for identifying opportunities to improve business process effectiveness and efficiency.

The tool itself outlines two methods for determining the administrative cost structure of individual microfinance products. Once product costs are determined, the tool suggests methods for understanding how and why costs are incurred for a specific for a specific product, and how the product contributes (or not) to the overall financial viability of the MFI. The design of the tool also facilitates customer segment analysis within particular product groups.

The authors also point out that although the tool applies equally to credit and savings products, the viability analysis focuses on savings products because this topic has been largely neglected in microfinance literature.

The tool is aimed at managers of MFIs with multiple products and managers of banks that have begun downscaling and want to understand the costs of their new microfinance product(s).

The topics covered in the tool are:

  • Production costing
  • Traditional cost allocation
  • Activity-based costing
  • Comparing traditional cost allocation with ABC
  • Analysing product costs
  • Analysing savings products
  • Additional applications of ABC

The appendices also include useful information on:

  • Examples of activities dictionaries and cost drivers
  • Detailed activity costs of attractive rural banks
  • Microfinance institutions that have tested the Microfinance Product Costing Tool
Author Helms, B and Grace, L in collaboration with MicroSave and Bankakademie
Publisher CGAP
Number of Pages 121 pp.
Primary Language English (en)
Region / Country Global
Keywords Costing, Sustainability, Agricultural Microfinance
Related Resources
Strategies for Financial Integration: Access to Commercial Debt Article 2004

view page
This resource appears in: Financial management

Financial integration is a key step in the evolution of the microfinance sector and a topic of current concern and interest for all sector participants. The development of financially sustainable microfinance institutions (MFIs) requires that these institutions place particular emphasis on integration into the local financial service sector. Although financial integration has several dimensions, including accessing debt, mobilizing savings, and utilizing capital markets instruments, the primary impetus for such integration is access to capital to fund growth. Having access to capital, whether from local or international sources, is a critical determinant of the ability of these institutions to continue expanding client outreach and deepening services, at a pace which will permit them to meet the demand for their services and to fulfill their potential for poverty alleviation.

This paper is intended primarily for managers of microfinance institutions. The note contains strategies and suggestions which will help MFI managers optimize access to commercial debt, as a step in financial integration. The note includes several appendices that will help MFI managers develop their bank relationships and improve their negotiating skills. The note incorporates two tools for microfinance institutions to use in working with commercial banks: 1) a checklist for financial managers in preparing themselves for a productive dialogue with commercial banks, and 2) an outline of a methodology which banks can use in analyzing microfinance institutions.

This paper begins with an examination of financial integration, and the progress made to date by MFIs in developing sustainable access to commercial funding. In addition, the paper identifies the challenges in accessing commercial funding, from the perspectives of the lender and the microfinance institution - and provides advice on how to improve this access. A continuing gap between what MFIs need and want, and what lenders are ready to provide exists. That gap can be reduced by building a shared understanding of key risk elements and key performance indicators in evaluating MFIs, and by helping lending and borrowing institutions find the win-wins.

Balance sheet for a financial institution Guideline 2004

view page
This resource appears in: Financial management

Like its companion guideline for the profit and loss account, this spreadsheet sets out the structure of a balance sheet for a financial institution line by line. Each item is listed, numbered and explained, so that a learner can clearly see how the balance sheet is constructed in terms of assets, liabilities and equity. It provides a quick and straightforward reference.

Costing and Pricing of Financial Services Toolkit 2003

view page
This resource appears in: Financial management

This toolkit is designed for use by microfinance institutions to enable them to conduct a full costing of their products and thus improve their efficiency and future business planning. It was developed with a leading Ugandan MFI and then tested with a large savings bank in Kenya, offering a wide variety of products. It was found that the basic procedures and principles were relevant to both large and small institutions.

The toolkit is in two parts. Part I explains the concept and a method of allocation based costing, using the simple and most commonly applied model of allocating each line of the Income and Expenditure Account to individually to products. Part II explains different pricing strategies. It explains the link between costing and pricing of financial services and shows how sustainable interest rates can be set. Illustrations are used throughout to clarify different pricing strategies.

To accompany the toolkit, MicroSave-Africa make available a spreadsheet with a worked example of allocation based costing for the Salama Microfinance Company. You can change variables in this to see how they affect the outcome of the costing exercise. There is also a sample costing report and a paper on Product Costing in Practice – The Experience of MicroSave-Africa.

The toolkit can form the basis of a training workshop and to facilitate this, MicroSave-Africa have provided a Costing Course Overview and a Trainer’s Manual in the form of a set of PowerPoint slides.

Author MicroSave
Publisher MicroSave
Number of Pages 73 pp.
Primary Language English (en)
Region / Country Global
Keywords Product Costing, Product Pricing, Sustainability
Related Resources
Why microfinance institutions in Bolivia have virtually ignored savings Journal Article 2003

view page
This resource appears in: Financial management

The benefits of savings mobilisation to both the institution and client are many, most importantly they provide a sustainable source of funding for a financial institution and offer clients a safe and liquid means in which to save. This paper examines Bolivia’s four main regulated MFIs – BancoSol, Caja Los Andes, FIE and Prodem – and finds that they have mobilized few deposits compared to banks, or compared to similar institutions elsewhere. It suggests that the availability of cheaper and easier donor funding is a disincentive to raising capital from depositors, and explains the internal obstacles to savings mobilization on the part of the MFIs.

This paper is extremely useful in landscaping the financial and political environment of MFIs in Bolivia and proposes realistic recommendations to institutions, government and donors that will encourage savings mobilisation in MFIs to the end that they may become robust deposit-taking microfinance banks. At institution level there must be a commitment to capture savings and diversify away from soft money and concessionary loans towards deposits in the capital base of the MFI. MFIs must also invest in human and financial resources in market intelligence, more sophisticated cost accounting systems, risk and liquidity management, training and incentives.

Government level reforms that loosen the reserve and reporting requirements in rural areas, support strategic alliances between regulated and non-regulated entities, eliminate the value-added tax on interest earned, reduce the I.D. requirement to open an account and allow minors to open savings accounts will create an enabling environment for the mobilisation of savings by regulated MFIs. Donors are advised to channel subsidies away from recapitalisation of loan portfolios towards institution building and especially to assist MFIs in their capacity building efforts. Subsidies should be used to support policy dialogue and regulatory reform and to develop strategic alliances between regulated and non-regulated institutions. There is also a need for the Donor community to improve coordination in both the development of donor strategy as well as monitoring the impact of donor interventions.

Originally published by Servicios Financerios Rurales (SEFIR) in Bolivia.

Definitions of Selected Financial Terms, Ratios, and Adjustments for Microfinance Guideline 2003

view page
This resource appears in: Financial management

The guideline begins by highlighting that the microfinance industry recognises and agrees on the need to establish standard definitions of financial terms and common indicators to assist in making comparisons between MFIs more meaningful and promote more transparency in MFI reporting. Transparency, it notes, is increasingly important in the industry as mature MFIs look to commercial funding sources and investors to support their growth.

The primary objective of this document is to put forward standard definitions for selected financial terms and to suggest a standard method of calculating certain financial ratios. The document is divided into three sections:

  1. a list of financial terms and definitions
  2. a description of financial ratios, and
  3. a brief discussion and description of financial adjustments
Author CGAP and consensus group
Publisher CGAP
Number of Pages 27 pp.
Primary Language English (en)
Region / Country Global
Keywords Analysis, Cost Accounting, Financial Reporting, Financial Ratios
Related Resources
Financing Microfinance: Exploring the Funding Side of Microfinance Institutions Paper 2003

view page
This resource appears in: Financial management

As the microfinance industry evolves, an increasing number of specialised formal microfinance institutions (MFIs) are emerging typically through the transformation of non-profit foundations. These newly regulated institutions face different opportunities and constraints to their sources of funds when switching from a funding environment dominated by donors, to a market-based competitive environment that offers a variety of funding sources.

The case studies from Mexico, Bolivia and Peru are useful to explain the various ways in which these formal sector MFIs have developed and deal with their funding issues, for example a tendency towards using financing from other financial institutions is most apparent, especially in the Bolivian and Peruvian cases. The key issues that are discussed include:

  • access to capital markets
  • greater reliance on foreign currency liabilities
  • the search for additional equity

The paper suggests that donors accept the changing landscape of the microfinance industry and their changing role within it. Donor agencies might serve the industry better by shifting the focus away from direct funding and onto removing barriers that currently prevent sustainable microfinance institutions from accessing funding from the public, from financial institutions, and from commercial and social investors.

Performance Indicators for Microfinance Institutions – Technical Guide Paper 2003

view page
This resource appears in: Financial management

This paper notes that recent years have seen a growing push for transparency in microfinance. An important aspect of this trend has been the increasing use of financial and institutional indicators to measure the risk and performance of microfinance institutions (MFIs). The paper also points out, however, that it is hard to achieve transparency if there is no agreement on how indicators measuring financial condition, risk and performance should be named and calculated.

The authors state that the purpose of this technical guide is relatively narrow. It highlights 14 of the most commonly used indicators and illustrates how they are used. It also aims to provide some explanation and analysis of the indicators as well as weaknesses. For each indicator the guide presents the proposed definition, interprets its meaning, identifies potential pitfalls in its use, and provides benchmark values for 32 Latin American microfinance institutions compiled by MicroRate.

The authors also note that the guide isn’t intended to be a complete “how-to” manual for appraising microfinance institutions. They note further, that it doesn’t discuss financial adjustments, which are needed when comparing institutions with very distinct accounting practices.

The indicators presented in the guide fall into four main categories:

  • portfolio quality
  • efficiency and productivity
  • financial management
  • profitability

The guide also provides an annex where the indicators are calculated through.

Author von Stauffenberg, D, Jansson, T, Kenyon, N and Barluenga-Badiola, M-C
Publisher MicroRate and Inter-American Development Bank
Number of Pages 58 pp.
Primary Language English (en)
Region / Country Global
Keywords Impact Assessment, Financial Ratios, Financial Indicators, Financial Analysis
Related Resources
Microcredit Interest Rates Guideline 2002

view page
This resource appears in: Financial management

This Occasional Paper published by CGAP outlines a method for estimating the interest rate that an MFI will need to realize on its loans, if it wants to fund its growth primarily with commercial funds at some point in the future. The model presented is simplified, and thus imprecise. However, it yields an approximation that should be useful for many MFIs, especially younger ones. Each component of the model is explained and then illustrated with an example based on the planning tool, MicroFin.

Many of the technical terms associated with interest rates are explained in the paper. Part A focuses on setting a sustainable interest rate; part B explains how to calculate effective interest rates for a variety of interest charging scenarios; and part C explores the theory and practice of exorbitant interest rates.

This paper provides a useful reference source for anyone working in a financial institution and should help to clarify the effects of flat rates, initial fees, up-front interest payments, compulsory savings and so on.

Author CGAP
Publisher CGAP
Number of Pages 13 pp.
Primary Language English (en)
Region / Country Global
Keywords Interest Rate, Sustainability, Cost Calculation, Microfinance Institutions
Related Resources
A Technical Guide to PEARLS: A Performance Monitoring System Document 2002

view page
This resource appears in: Financial management

This paper explores the PEARLS financial performance monitoring system, which is designed to offer management guidance for credit unions and other savings institutions. PEARLS is a set of 45 financial ratios used to evaluate and monitor the financial stability of credit unions within the World Council of Credit Unions (WOCCU). The ratios are grouped under six crucial areas of financial performance which are:

  • Protection
  • Effective financial structure
  • Asset quality
  • Rates of return and costs
  • Liquidity, and
  • Signs of growth

The PEARLS methodology is driven by financial performance. WOCCU believes that overall institutional performance is best measured by quantitative results. Thus, each indicator has a prudential norm or target goal specified by WOCCU on the basis of its field experience working to strengthen credit unions and promote savings-based growth. These standardised evaluation ratios and formulas create a universal financial language for organisations to internally evaluate themselves and compare with other credit unions, and to offer depositors (and regulators) the confidence that their savings institution meets widely accepted standards of excellence.

While PEARLS does not explicitly address management issues, it is designed to act as an early warning system for internal use by management. For instance, the use of the system permits managers to rapidly pinpoint troubled areas early and to make the necessary adjustments before the problems become grave, or to identify a weak capital base and the likely causes.

Author Cora Evans, A.; Branch, B.
Publisher World Council of Credit Unions, Inc. (WOCCU).
Number of Pages 12 pp.
Primary Language English (en)
Region / Country Global
Keywords Performance Monitoring, Financial Ratios
Related Resources
Financial Performance Monitoring: A Guide for Board Members of Microfinance Institutions Guideline 2001

view page
This resource appears in: Financial management

Among the many responsibilities of a board of directors is monitoring performance. In the case of financial institutions, board members must be capable of monitoring financial performance. "A good board member asks questions, including financial questions." To be more precise, a good board member must ask relevant and timely financial questions that assist the board in making decisions. For many board members of MFIs, especially those who have limited experience in microfinance or are new to the board, it is not always easy to know what questions to ask or when to ask them. Board members do know whom to ask; management answers the board’s questions. However, if questions are asked too late, or do not address crucial issues, important information might never be shared—not necessarily out of lack of transparency, but out of lack of preparedness of board members.

In order to ask relevant and timely financial questions, board members of MFIs need to be familiar with performance monitoring techniques. This requires that the board have a basic understanding of the key quantitative and qualitative information needed to govern an MFI. The purpose of this manual is to provide reference material for MFI board members to help them understand the role of financial performance monitoring as part of governance and what to look for when monitoring financial performance.

However, the manual is not a financial analysis handbook. While the concepts of financial analysis are discussed, including financial ratios, it will not train the reader how to be an analyst. Rather, it offers suggestions on what a board member should look for when presented with financial statements and ratios, and introduces different methods of financial analysis. The manual does not provide “right” or “wrong” answers; rather, it explains how a board can distinguish between information that makes sense and reveals positive trends that further the goals of the MFI and answers that do not make sense or that may signal trouble ahead.

It is assumed that the manual will be accompanied by a training session for the board, tailored to meet the MFI board’s particular needs. The training would be a hands-on session, utilizing the MFI’s own financial data, and would include some or all of the exercises and activities detailed in the annexes of the guide.

The manual is divided into four chapters. The first briefly discusses an overall performance monitoring system, highlighting the traditional involvement and responsibilities of an MFI board in maintaining that system. Chapter Two focuses on financial performance monitoring and provides detailed information on financial statements, financial analysis, and ratio analysis. Chapter Three discusses financial reporting by management. The fourth chapter briefly discusses the challenges that a board may face in maintaining an adequate performance monitoring system and provides some suggestions on how to address the same. The annexes contain several exercises in financial and ratio analysis to help build the understanding and skills of board members in order to enable them to perform their financial performance monitoring duties. Annex 1 includes a performance monitoring worksheet that will help a board design a performance monitoring system of its own. Annex 2 includes a series of exercises that the board can use to analyze the financial performance of its MFI. Annex 3 contains an example of break-even analysis, and Annex 4 provides a financial reporting checklist. Finally, Annex 5 contains a resource list for more information on financial performance monitoring.

Author Nancy Natilson; Tillman A. Bruett
Publisher USAID; DAI
Number of Pages 72 pp.
Primary Language English (en)
Region / Country Global
Keywords Governance, Performance Monitoring, Financial Analysis
Related Resources
Delinquency measurement and control and interest rate calculation and setting Document 2001

view page
This resource appears in: Financial management

These course notes from CGAP contain the main technical messages and concepts that they deliver in their training courses. CGAP emphasise that the materials alone to not substitute for attending a course which incorporates case studies and exchange of experience with others. However, if you are looking for a concise overview and summary of the issues and methods relating to delinquency management and interest rate calculation, then these are an excellent resource.

Module one covers the delinquency management topic. It contains sections on:

  • Understanding the causes and costs of delinquency
  • Measuring delinquency, including the quality of loan portfolio, portfolio at risk, repayment rates and the effect of loan loss provisions, reserves and write-offs on financial statements
  • Controlling delinquency

Module two covers interest rates. It contains sections on:

  • Interest rate concepts and MFI sustainability
  • Setting sustainable interest rates
  • Effective interest rates, including the impact of fees, forced savings and loan terms on effective interest rates
  • Costs of credit from the borrower's perspective
  • Confronting barriers to setting sustainable interest rates
Author CGAP
Publisher CGAP
Number of Pages 34 pp.
Primary Language English (en)
Region / Country Global
Keywords Arrears Control, Interest Rate
Related Resources
Sources of Funds for Agricultural Lending Book 1999

view page
This resource appears in: Financial management

This book describes the different sources of funds which financial institutions use to make loans: government budget funds, donor funds, central bank credit lines, interbank loans, savings, debt and money market instruments and equity. It gives an overview of the current liability composition of rural financial institutions world wide and recent trends and shifts, together with a qualitative analysis of the advantages and disadvantages of each source of funds from the financial institution's point of view.

Based on this analysis recommendations are made regarding the most appropriate combination of funds to secure financial sustainability and independence whilst fulfilling the general goal of providing the necessary inputs for agricultural investments.

Selecting and Installing a Portfolio Management System Article 1999

view page
This resource appears in: Financial management

As microfinance institutions (MFIs) scale up their operations, the need for timely and accurate information about their portfolios increases. The reliability of their management information systems (MIS) is often the difference between the institution’s success or failure. This useful article describes the process involved in selecting the proper MIS. As such, it will be of interest principally to managers of MFIs.

The author divides the process of choosing an MIS into three sections: assessing institutional needs, evaluating and selecting an MIS, and the process and cost of installing an MIS. The first section, the author stresses, is of maximum importance: as different institutions have different needs, a loan-tracking package that functions well for one MFI will not necessarily answer the needs of another MFI. Differences in lending methodologies make transferring a software package impossible. Moreover, different MFIs have different levels of sophistication, roughly divisible according to the number of clients served: small-scale MFIs with fewer than 2000 clients have different needs to those of medium-sized institutions with from 2000 to 10,000 clients, which are less complex again than large-scale microfinance institutions with more than 10,000 clients. A simple MIS will suffice for the least sophisticated MFI, while expanding medium-sized “transitional” (from smaller to larger) MFIs often need a complex MIS but do not have the resources to develop one. Large MFIs usually have well-established operating procedures and skilled staff, and can often justify the high cost (sometimes more than $100,000) of developing their own MIS. The article outlines, step by step, the method of identifying the information needs of different types of MFI, by suggesting useful questions whose answers will help managers select an information system. Moreover, the longevity of an MIS should be about five years, at minimum, with the capacity to grow with the institution. So flexibility is an important deciding factor in choosing an MIS.

Input from key staff is considered essential. Indeed, a task force of personnel including one knowledgeable person from each department and from each level of the institution should be formed, to assess staff capabilities, technologies, and cost considerations. Staff computer literacy is a critical ingredient. Not only that, but it is necessary to consider hidden costs like technical assistance after the software is installed. The task force ought to consider these issues carefully before moving on to selecting an MIS. There are three options for management information systems: first, to buy one off the shelf; second, to modify an existing system used elsewhere; and third, to develop a custom system in-house. The article considers each option carefully. Using off-the-shelf products can end up affecting the way the MFI itself does business, simply because the product has limited flexibility. The second option, modification of an existing system, is often the most attractive, given the very high cost of designing a system in-house.

The article provides a very useful framework for asking logical but often not obvious questions about an MFI’s requirements for a management information system. Following its suggestions would form a useful, even essential first step in tackling the complex problem of managing an MFI’s information.

Author Waterfield, C.
Publisher ITDG Publishing
Number of Pages 10 pp.
Primary Language English (en)
Region / Country Global
Keywords Management Information Systems (Mis), Portfolio Management, Loan Recovery
Related Resources
Balancing Act: a microfinance accounting game Document 1999

view page
This resource appears in: Financial management

This game was produced to provide training course participants with a practical learning experience. By the end of a session using the game, participants will have practised accounting and decision-making and produced financial statements from the information generated during the game. It takes one full day to introduce, play and wrap-up the game. It is suitable for groups of 4-5 players and one trainer could supervise two playing groups.

The game is designed to consolidate and apply methods learned in the Calmeadow Financial Management Training Module I: Accounting, by taking players through a year in the life of a micro-loan fund as they move around a board containing scenarios and transactions. Transactions include disbursing and collecting loans, accessing various forms of debt, and investing excess funds. Players practise entering the transactions into financial record forms, such as the General Journal and General Ledger, and have to calculate how each transaction affects the Balance Sheet and Income Statement.

The original game was marketed as a set containing a board, cards and dice. It is now difficult to obtain this and it has been provided here in English as a set of downloadable guidelines. Using these it is possible to create your own playing board, cards and player instructions. You only need to add dice to be able to play the game. The Accounting Study Guide is also available as a downloadable document in the RFLC and provides the accounting knowledge necessary to play the game.

Information systems for microfinancial services Article 1999

view page
This resource appears in: Financial management

This article provides an overview, as of early 1999, of different information systems available for use in microfinance. The management of information has a clear importance for microfinance institutions (MFIs). Poor information systems have an impact on every aspect of an institution’s performance, from operational effectiveness to strategic management. The authors carried out a survey, world-wide, with the aim of discovering which information-management packages were used in a variety of MFIs. The article is based on 93 completed questionnaires, all but two from MFIs (the others were from FAO), which represents only a 20% response rate, and thus its conclusions can only be considered tentative. All those who responded (apart from FAO) run credit programmes, with 52% having a village bank-type programme, 62% a group solidarity methodology, and 45% an individual credit scheme. Thus a variety of different methods can be said to be covered by the survey.

The authors were particularly interested in information technology (IT) and computerised information systems. The principal question in this area is whether to use an off-the-shelf standardised package or to pay more to have a fully-customised system, or perhaps some hybrid of the two. The majority of respondents indicated the use of a mixed manual and computerised system, though about a third indicated that they used a purely manual system. Most large MFIs use computers for loan tracking, but a fully-integrated system – one in which one entry into a computer database is fed automatically through all levels of the system – was not seen as necessary to manage a large portfolio.

Interestingly, a majority of respondents indicated that they were using IT systems that were either fully customised (24% of respondents) or partially customised (30%). This tends to imply the existence of an in-house IT department, and indeed 58% of the institutions queried had permanent IT staff, 93% of which were given the task of developing future systems as well as maintaining the current ones. Of the off-the-shelf products available, FAO’s MicroBanker is the most widely-used system in the world, but only four respondents said they used it. MicroBanker and two other systems permit some adaptation of the system’s functioning by system administrators rather than programmers, but there is a real danger that a computerised system and its limited flexibility could determine financial product design itself, a clear example of the “tail wagging the dog”. Moreover, as of 1999, none of the three systems which permit product flexibility showed much skill at generating new management information about non-standard products or adapting the report style to reflect new financial products. Discouragingly, even systems in development at time of writing did not, in general, allow the easy incorporation of new products.

Information management appears to be a difficult area for many MFIs. Two areas of weakness need improving: first, there is a lack of understanding of information problems and possible solutions, and second, there is an absence of software packages appropriate to the sector. IT management remains a highly specialised sector and this may continue to be a barrier to solving the above problems. This article is an interesting starting-point for MFIs considering how to approach the problem of data management, but it seems likely that the market in information systems for rural finance has developed significantly over the last six years, and a new survey is needed to reflect the current situation.

Author FERRAND D.; HAVERS M.
Publisher ITDG Publishing
Number of Pages 13 pp.
Primary Language English (en)
Region / Country Global
Keywords Management Information Systems (Mis), Computers, Cost Accounting
Related Resources
Microsavings Compared to Other Sources of Funds Paper 1999

view page
This resource appears in: Financial management

This paper highlights that in order to take full advantage of savings as a source of funds, microfinance institutions (MFIs) have to be aware of the implications regarding costs and risks involved with the deposit business. The paper discusses various aspects of savings as a source of funds compared to other sources such as equity, commercial loans, grants and others.

It begins by examining the liabilities structure of traditional banks and non-bank financial institutions, looking at the different sources of funds generally acquired. The following section then highlights the costs and risks involved in the various funding strategies. Costs consist largely of indirect and direct financial costs as well administrative costs, and risk is made up of liquidity risk, interest rate risk, credit loss risk, foreign exchange risk and concentration. As well as discussing the key factors behind cost and risk, this section also considers ways of reducing and mitigating their impact.

The paper notes that three categories of MFIs can be identified according to their primary funding source:

  • Full-fledged financial intermediaries such as commercial banks with emphasis on microclients;
  • Savings-driven financial institutions such as savings and credit cooperatives and self-reliant village banks;
  • Donor-driven non-government organizations with special micro-lending programmes;

The most important mechanisms for full-fledged financial intermediaries and savings-driven financial institutions are deposits. For the third group, however, funds largely arise from grants and soft loans provided by donors or governments, which the paper argues only develops weak links with commercial financial markets. It argues further that many donors and microcredit institutions have not embarked on a strategy that promotes loans and savings, insurance and payment services as financial services in their own rights.

The latter sections of the paper examine the differences between the funding strategies of MFIs and traditional financial institutions to provide insights into the existing obstacles for commercialising and "popularising" the sources of funds in MFIs.

Management Information Systems for Microfinance Institutions: A Handbook Document 1998

view page
This resource appears in: Financial management

This handbook was written to help microfinance institutions improve or replace their management information systems. It starts with an introduction to information issues, explaining why information is important and comparing manual and computerised systems.

The second chapter concentrates on accounting systems. It compares cash with accrual systems, provides a chart of accounts and introduces financial statements.

Chapters 3 and 4 deal with issues relating to report design and tracking performance through indicators. Different types of reports to meet the needs of clients, field staff, managers, boards, donors, shareholders and regulators are reviewed and the following indicators are explained: portfolio quality, profitability, financial solvency, growth, outreach and productivity.

The final chapter outlines a stepwise approach to developing and implementing a management information system from conceptualisation to system maintenance and audits.

The annexes contain an introduction to MIS software and technology and a wide range sample report forms, e.g., savings, loan activity, portfolio quality, income statement, balance sheet, cash flow and summary reports.

The text contains some boxed case studies, e.g., the experience of BRAC with integrating manual and computerised systems and how SHARE manage performance through reporting and information systems.

Author Waterfield, Charles; Ramsing, Nick
Publisher PACT Publications and CGAP
Number of Pages 203 pp.
Primary Language English (en)
Region / Country Global
Keywords Management Information Systems (Mis), Financial Analysis, Microfinance Institutions
Related Resources
Loan Performer Software English (en)

view page
This resource appears in: Financial management

Loan Performer software is a Management Information System that integrates basic Client data with Shares, Savings and Loan transactions and every entry is automatically updated in the General Ledger.

Loan performer handles individual clients as well as groups. Deposits and loans can be tracked at group level or at group-member level. This makes the program suitable for Solidarity lending, Village-Banking and Grameen-type lending.

Loan Performer comes standard in 4 languages: English, French, Spanish and Russian that can be mixed in the same network. It handles 11 user levels: guest user, savings officer, loan officer, cashier, teller, assistant accountant, accountant, assistant manager, manager, and supervisor. Also, it comes with more than 150 standard reports, which can be run with a wide variety of criteria.

Loan Performer has the following modules:

  • Base module
  • Shares
  • Savings
  • Loans - software supports individual lending as well as group lending with either tracking of group loan at group level (Village Banking) or at group member level (Grameen type lending)
  • Accounting (with Assets and Debtors/Creditors modules)

Pricing policy of the organizations is that for the companies up to 500 clients/loans, Loan Performer is free of charge. A single user, one branch license is USD 900 plus 20% annual fees. The company charges an annual fee for free updates and email/phone/fax/FTP support. A 5-user, one branch license is USD 1,600 plus 20% annual fees. A 12-user, one branch license is USD 2,200 plus 20% annual fees. A 20-user SQL Server or SQL Server Express license is USD 3,000 plus 20% annual fees. In the case when an organization has more than one branch and wants to buy licenses for several branches, the company gives rebates according to the number of branches (starting from 35% onwards).

Loan Performer software has been developed by Crystal Clear Software Ltd., Uganda based company. The software has been rated as “Best value for money” by CGAP.

Loan Performer  -  English (en)

Finance Solutions® Software Software English (en)

view page
This resource appears in: Financial management

Finance Solutions® is a fully integrated software which provides an integration factor of 100% in Client Information, Savings, Shares, Loans and General Ledger Accounting modules, Fixed Deposit, Foreign Exchange and minimizes many "islands of data capture points" for improved data reliability, consistency and accuracy. It is a Multi-Currency, Multi-Users, Multi-lingual, Multi-Database software.

A Finance Solutions focused and customizable MIS for Microfinance, SACCOs, Village Banking MACTS/SHG (Self Help Group) methodologies.

Finance Solutions® software has been reviewed by the Consultative Group to Assist the Poorest (CGAP) and rated as "User Friendly Software".

Key features are:

  • It tracks Accounts, Loans, Savings, Shares, Fixed Deposit and Client Information
  • It supports SQL-SERVER database as back-end
  • It is suitable for Small, Medium and Large Institutions
  • It produces Performance Monitoring Tool (PMT) Reports
  • It produces Cash Flow, Balance Sheet, Profit & Loss (P&L), Trial Balance Reports
  • It produces Arrears & Ageing, Portfolio at Risk, Outstanding and Disbursement, Audit Trail Reports
  • It produces Savings/Shares concentration, Balances, Activity, dormant Reports
  • Excellent connectivity on Local Area Network (LAN) and WAN (Centralized Database)
  • It is a Windows based application with easily identifiable TOOLBAR and MENUS
  • It is a Multi-user password protected system with 12 user defined system user groups
  • It is a Multi-lingual software (English, French, Spanish, Russian, Portuguese, Luganda, Kiswahili and user-definable)
  • No need to buy third-party accounting software
  • Fully customizable
  • It is a multi-currency software

Finance Solutions® costs range from US$ 1,000 - US$ 15,000 plus, depending on the number of users, database selected and the number of clients you have, you also need a license for every branch/site. Sigma Data & Computers Ltd. offers 24 x 7 days support on-site or via e-mail, fax and telephone. Annual maintenance fees are at 20% of the license costs.

Finance Solutions® Software  -  English (en)

Search Library Resources