MICROCAPITAL PAPER WRAP-UP: “Technical Guide: Performance and Social Indicators for Microfinance Institutions;” by Sebastian von Stauffenberg, Damian von Stauffenberg, Maritza Rodriguez, Rebecca Spradlin, Antonio Bryant; Published by MicroRate

“Technical Guide: Performance and Social Indicators for Microfinance Institutions;” by Sebastian von Stauffenberg, Damian von Stauffenberg, Maritza Rodriguez, Rebecca Spradlin and Antonio Bryant; Published by MicroRate; 2014; 64 pages; available at http://www.microrate.com/media/downloads/2014/05/MicroRate_-Technical-Guide-20142.pdf

Published by MicroRate, a US-based rating agency that evaluates risk and performance of microfinance institutions (MFIs), this guide provides an outline on how to assess the quality of an MFI. The authors present and evaluate 14 commonly used indicators of financial performance and introduce four others that measure social performance. The 18 indicators are broken down into five groups: portfolio quality, efficiency and productivity, financial management, profitability, and social performance.

The authors state that the most popular and widely accepted gauge of portfolio quality is the portfolio-at-risk ratio. This is calculated by dividing the sum of restructured loans and the outstanding balance of loans with payments 30 or more days overdue by the gross loan portfolio. This indicator gives a conservative measure of risk for an institution and, as of 2012, it ranged globally from 0.7 percent in South Asia to 4.5 percent in Latin America. In addition, the authors present write-off ratio, impairment-expense ratio and risk-coverage ratio as useful indicators of portfolio quality.

Efficiency and productivity indicators measure the quality of an MFI’s operations. Productivity is measured by the output per unit of input, and efficiency is measured based on the cost of inputs relative to the price of outputs. According to the authors, the most accurate indicator of efficiency is the operating-expense ratio, which is calculated by dividing operating expenses by the average annual gross loan portfolio. The other measure of efficiency discussed is the cost-per-borrower ratio, and the two indicators of productivity are the personnel-productivity ratio and loan-officer-productivity ratio.

The section of the paper on financial management addresses how to assess the liquidity of an MFI – the likelihood that it will be able to continue distributing loans to borrowers and repaying wholesale debt. The authors present three indicators in this category: financial-expense ratio, cost-of-funds ratio and debt-to-equity ratio. The financial-expense ratio is calculated by dividing expenses on funding liabilities by the average gross loan portfolio. This indicator gauges the interest expense sustained by an MFI to fund its loan portfolio, and it can be used to establish a minimum lending rate that the MFI must charge to cover its expenses.

Profitability indicators give a summary of the overall performance of an institution, although they do not show how or why an MFI is effective or ineffective. The profitability indicators are: return on assets (ROA), return on equity (ROE) and portfolio yield. ROE is calculated by dividing net income by average equity, and it can be used to assess the profitability of investments in an MFI. ROA is calculated by dividing net income by average assets, yielding an indicator of an MFI’s profit margin. As of 2012, MFIs around the world maintain an average ROE of 13.4 percent and ROA of 3 percent.

The authors note that social performance, or the amount of positive social impact an MFI has on those with whom it works, is not traditionally included in assessments of MFIs, but that there “has been a growing demand for transparency on the social performance of MFIs.” They include four metrics for measuring an MFI’s social responsibility in this paper: national-loan-size ratio, borrower-retention ratio, staff-turnover ratio and social-efficiency index. National-loan-size ratio is calculated by dividing the size of the average loan an MFI disburses by the gross domestic product (GDP) per capita of the country in which the MFI operates. This indicator gives context for the loan size as a percentage of the average wealth of the country.

By Benjamin Krupp, Research Associate

About MicroRate

MicroRate is a for-profit microfinance rating agency formally approved by CGAP (Consultative Group to Assist the Poor); the Inter-American Development Bank; and Peru’s Superintendency of Banking, Insurance and Pension Fund Managers (SBS). It was founded in the US in 1997 with the intent of objectively evaluating microfinance institutions (MFIs), thereby increasing transparency and driving additional funding into microfinance. MicroRate has completed approximately 750 ratings of approximately 200 MFIs worldwide as of 2013 and claims to perform its evaluations not through “rigid rating formulas,” but through the “evaluation of critical risk.” A private company, MicroRate is based in Washington, DC, with offices in Peru and Morocco.

Sources and Additional Resources

[1] MicroRate, 2014: Technical Guide: Performance and Social Indicators for Microfinance Institutions

MicroCapital, January 27, 2014: “A Guide to Responsible Investing,” Published by MicroRate

MicroCapital, November 25, 2013: “The State of Microfinance Investment 2013,” Published by MicroRate

MicroCapital, August 22, 2011: MicroRate’s “The State of Microfinance Investments 2011” Indicates Resilience During Economic Downturn

MicroCapital Universe Profile: MicroRate

Do you know that MicroCapital publishes the MicroCapital Monitor newspaper each month? Find out more at https://www.microcapital.org/products-page/

 

 

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