MicroBanking Bulletin/ MicroBanking Standards Project


The MicroBanking Standards Project was founded in 1997 to help MFIs understand their performance in comparison with their peers, to establish industry benchmarks/performance standards, to enhance the transparency of financial reporting, and to improve the performance of MFIs. The Project has grown to include 124 leading MFIs from 45 countries. It collects uniformly reported, audited financial and portfolio data from each of its members. The Project is an independent review service for agencies which would like to outsource data collection and analysis; a technical service provider supporting agencies in improving their partners' information systems; an information source providing international comparisons customized to the needs of the agency or partner organizations. The Project publishes the MicroBanking Bulletin, which collects information from leading MFIs and breaks data down by region and peer group in order to establish industry benchmarks. The results of these comparisons are disseminated to Micro-finance practitioners and researchers twice a year.

MFIs participate in the Project on a quid pro quo basis. They provide information about their financial and portfolio performance, as well as details regarding accounting practices, subsidies, and the structure of their liabilities. They also submit substantiating documentation, such as audited financial statements, annual reports, program appraisals, and other materials that help understand their operations. The Project does not independently verify the information. It prepares a confidential financial performance report for each participating institution. These reports explain the adjustments made to the data and compare the institution's performance to its peer group as well as to the whole sample of project participants.

The Project also provides another core service. It works with networks of MFIs to enhance their ability to collect and manage their financial performance indicators. This service is provided in a variety of different ways, including teaching networks to collect, adjust and report data at the local level, collecting data on behalf of a network, and providing customized data analysis to compare member institutions to external peer groups. A Performance Monitoring and Benchmarking toolkit is also available to build the capacity of networks to perform benchmarking for their members.

Participation in the Project
The Project is open to all MFIs that are willing to disclose financial data that meet the quality test. Information from participating institutions is classified by the degree to which there is independent verification of its reliability. AAA-graded information is independently generated through a detailed financial analysis by an independent third party, such as a CAMEL evaluation, a CGAP appraisal, or assessments by reputed rating agencies (PlaNet Rating, M-CRIL, and Microrate). A-graded information is backed by accompanying documentation, such as audited financial statements, annual reports, and independent program evaluations that provide a reasonable degree of confidence for adjustments. B-graded information is from MFIs that have limited themselves to completing the questionnaire. These grades signify confidence levels on the reliability of the information and they are not intended as a rating of the financial performance of MFIs.

Project methodology: Criteria for setting up the Peer Groups
Since the Micro-finance industry consists of a range of institutions and operating environments, an MFI needs to be compared to similar institutions for the reference points to be useful. The Project addresses this issue with its peer group framework. Peer groups are sets of programs that have similar characteristics-similar enough that their managers find utility in comparing their results with those of other MFIs in their peer group. The Project forms peer groups based on 3 main indicators:

  1. Region: Africa, Asia, Eastern Europe, and Latin America.
  2. Scale of operations: small, medium, or large according to the size of the MFI's loan portfolio. This facilitates comparisons of institutions with similar outreach. This indicator considers that regions demonstrate different growth patterns. Thus, a program that would be classified as large in Africa, for example, would be considered medium in Latin America.
  3. Target market: low-end, broad, and high-end according to the range of clients served. This is based on average loans outstanding per GNP per capita.

Besides these primary indicators, the Project applies 2 secondary criteria in Latin America to further homogenize the peer groups. First, all credit unions are grouped together. Since these organizations are savings-driven, they have a unique cost structure that makes comparison with other MFIs less useful. The other secondary criterion applied in Latin America (for institutions that fall in the low-end category) is the country income level. The operating conditions in upper income countries in terms of labour markets, levels of productivity, and customer characteristics, are quite distinct from the lower income countries in the region. The high number of institutions offering low-end loans justifies the breakdown into multiple peer groups.

Financial Adjustments
Financial data is adjusted to ensure comparable results. There are 3 major adjustments that are applied to produce a common treatment for the effect of: a) inflation, b) subsidies, and c) loan loss provisioning and write-off. The goal is to provide a common analytical framework to compare real financial performance. The 2 main areas of potential distortion are unreported subsidies and misrepresented loan portfolio quality.

Subsidy Adjustment.
Participating organizations' financial statements are adjusted for the effect of subsidies by representing the MFI as it would look on an unsubsidised basis. Most of the participating MFIs indicate a desire to grow beyond the limitations imposed by subsidized funding. The subsidy adjustment permits an MFI to judge whether it is on track toward such an outcome. A focus on sustainable expansion suggests that subsidies should be used to enhance financial returns. The subsidy adjustment simply indicates the extent to which the subsidy is being passed on to clients through lower interest rates or whether it is building the MFI's capital base for further expansion. Adjustment is made for 3 types of subsidies: (1) a cost-of-funds subsidy from loans at below-market rates, (2) current-year cash donations to fund portfolio and cover expenses, and (3) in-kind subsidies, such as rent-free office space or the services of personnel who are not paid by the MFI and thus are not reflected on its income statement.

Loan Loss Provisioning Adjustment.
Standardized policies are applied for loan loss provisioning and write-off. MFIs vary tremendously in accounting for loan delinquency. Some count the entire loan balance as overdue the day a payment is missed. Others do not consider a loan delinquent until its full term has expired. Some MFIs write off bad debt within one year of the initial delinquency, while others never write off bad loans.

Indicators and Ratios

  • Outreach and institutional indicators: age of institution, number of offices, number of staff, active borrowers, and percent of women borrowers.
  • Macroeconomic indicators: GNP per capita (current prices), GDP growth rate, inflation rate, deposit rate, and financial deepening.
  • Profitability: adjusted return on assets, adjusted return on equity, operational self-sufficiency, financial self-sufficiency, and profit margin.
  • Income and expense: operating income ratio, operating expense ratio, net interest margin ratio, portfolio yield, real interest yield, total interest expense ratio, adjustment expense ratio, loan loss provision expense ratio, salary expense ratio, other administrative expense ratio, and total administrative expense ratio.
  • Efficiency: total administrative expense/ loan portfolio, salary expense/ loan portfolio, and other administrative expense / loan portfolio.
  • Productivity: average salary, cost per borrower, staff productivity, loan officer productivity, staff allocation ratio, and staff turnover.
  • Portfolio: portfolio at risk > 90 days (outstanding balance of loans overdue > 90 days), total gross loan portfolio, average loan balance, and depth (average loan balance GNP per capita (%)).
  • Capital and liability structure: commercial funding liabilities ratio and capital / asset ratio.
  • Clarification of terms: operating income, operating expense, adjusted operating income, adjusted operating expense, administrative expense, personnel expense, adjusted total interest expense, adjusted net interest margin, net operating income, adjusted net operating income, adjusted total equity, and adjusted total assets.

Hari Srinivas - hsrinivas@gdrc.org
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