How to Make Microcredit Organizations Financially Independent

"Pay back your loans." - The response of Grameen Bank borrower Shahina when asked if she has a massage she would like to share with the world.

Repaying loans give people dignity and confidence. Accepting donations makes people feel dependent. These simple truths are what attracted many of us to microcredit. We have seen it in the eyes of the borrowers. Taking a loan, running a small business, repaying the lean and taking another loan. It is a cycle that gives borrowers a strength they could never get from a handout. The same could be said for microcredit organizations. Most are dependent on donations which fluctuate with the changing priorities of the donors. If microcredit organizations took out loans and paid them back, they would create a more stable, independent source of funding. They would gain dignity and confidence.

Loans to microcredit, organizations could take many forms. We are not far from the day when a mutual fund investor in the United States can have the satisfaction of knowing her money is financing the expansion of microcredit as well as paying a return. The International Financial Advisory Group to the Microcredit Industry -- which has 15 members with backgrounds in accounting, finance, business and microcredit -- is committed to making that possible.

We believe loans will make microcredit organizations more independent and will open the door to a much larger pool of money. If we are going to make credit available to 100 million of the world's poorest families by 2005, we will heed to tap the financial markets.

Some microcredit organizations -- including the Grameen Bank and Banco del Sol -- have raised money in the financial markets. They have found it to be less cumbersome and restrictive than soliciting donations.

The key to tapping the financial markets is a track record. Most microcredit organizations will depend on donations when they start. But once an organization is five to ten years old and has documented its ability to recover loans, it can raise money in the financial markets.

To do that microcredit organizations should start keeping records in accordance with standard accounting practices. A common accounting framework is the CAMEL system, which documents the Capital, Asset Quality, Management, Earnings and Liquidity of an organization. Our group has adapted this framework (with the addition of a Social Impact section, making it CAMEL-S) for use by microcredit organizations.

A version of the CAMEL framework has been used by Accion International for several years. CAMEL was generally accepted by 25 people who attended a June meeting on microcredit accounting hosted by Maria Otero of Accion.

The following table gives an idea of the application of CAMEL, with explanatory notes below.

* Dependency Ratio (1) 1.6% 10.0% 21.6% 111.1%
* Capital to Assets Ratio (1)(2) 1.5% 145.4% 1.8% 35.6%
* Debts to Assets Ratio (1) 0.0% 0.0% 76.5% 126.0%
Asset Quality
Loan Loss
Provision Ratio (3)





Portfolio in Arrears Ratio 0.7% 1.6% 7.3% ---
30 days
0.5% xxx xxx 3.8%
60 days
0.0% xxx xxx 1.0%
90 days
0.1% xxx xxx 6.1%
Loan Loss Ratio 0.0% 0.9% 0.9% 7.6%
Reserve Ratio 3.2% 2.0% 4.4% 9.0%
Management (4)
# of active borrowers
per credit officer
156 217 240 25
# of active borrowers
management staff
780 1,732 611 79
# of new borrowers
to total borrowers ratio
xxx xxx 10.7% 26.1%
* Portfolio per credit officer $ 11,227 $ 20,396 tk 1,490 $ 12,169
* Cost per unit of money lent $0.30 $0.23 tk0.05 $1.21
* Cost per loan made $21.84 $15.50 tk 217.99 $ 413.96
Average Loan Size

* Return on
Performing assets
49.2% 40.0% 8.8% 20.6%
Return on total average assets (5) xxx 27.0% 7.8% 12.7%
Financial cost ratio 0.6% 2.0% 6.2% 4.7%
* Administrative cost ratio 96.1% 43.0% 6.1% 207.2%
* Operating self-
sufficiency ratio
49.7% 84.7% 102.0% 9.4%
* Financial self-
sufficiency ratio
49.7% 82.9% 93.0% 6.1%
* Current Ratio:




6 months
xxx xxx xxx 77.9%
Social Impact
% borrowers below
poverty line
xxx xxx xxx
% borrowers 50% of
below the poverty line.
xxx xxx xxx
% women xxx 98% 94% 58%
% landless xxx xxx xxx
% borrowers out of
poverty in
1 year




2 years
xxx xxx xxx
3 years
xxx xxx xxx
First time borrowers

Notes for Financial Grid of Microcredit Lending Institutions

* Based on the values provided, a discrepancy probably exists in the way the calculations were made. Further clarifications will be necessary.

  1. Grameen: Total assets at year end 1995 was used as the denominator instead of average performing assets.
  2. Grameen: Donations and grants are not included in the definition of capital.
  3. Grameen: Value of loans outstanding was used as the denominator, instead of average performing assets.
  4. Grameen: Management staff excludes supervisory positions not directly related to issuing loans (i.e. employees who supervise offices or regions).
  5. Grameen: Average total assets was used as the denominator instead of total assets.
  6. Grameen: Financial expenses + provisions was used as the denominator instead of financial and administrative expenses + provisions.
  7. Grameen: Denominator used was administrative expenses + provisions + imputed cost of capital instead of financial and administrative expenses + provisions + imputed cost of capital.

Capital Asset Management Earnings Liquidity


Dependency Ratio
  • Formula: Donations and grants/Total performing assets
  • Purpose: Shows dependency of institution on outside funding for operations.
  • Definition: Average performing assets - beginning balance and ending balance are averaged for the period (including loans, investment and advances). Performing assets currently pay interest or are not more than 60 days past due.

Capital to Assets Ratio
  • Formula: Capital/Total performing assets
  • Purpose: Shows overall capital sufficiency
  • Definition: Capital - networth (Assets-Liabilities). Includes equity or equity equivalent instruments including retained earnings and subordinated debt. Does not include donations and grants

Debt to Asset Ratio
  • Formula: Total liabilities/Total performing assets
  • Purpose: Indicates provisioning requirements on loan portfolio for current period.
  • Definition: Loan loss provision - allocation in current period to the loan loss reserve.


Loan Loss Provision Ratio
  • Formula: Loan loss provision/average performing assets
  • Purpose: Indicates provisioning requirements on loan portfolio for current period
  • Definition: Loan Loss Provision - Allocation in current period to the loan loss reserve.

Portfolio in Arrears
  • Formula: Balance of loans in arrears/value of loans outstanding
  • Purpose: Measures amount of default in portfolio
  • Definition: Arrears - past due; typically calculated in the basis of the loan advance.

Loan Loss Ratio
  • Formula: Amount written off/Average loans outstanding
  • Purpose: Indicates extent of uncollectible loans over the last period. Any loan more than on year past due will be automatically considered uncollectible.
  • Definition: Amount written off - a loss recognized on a loan in a period.

Reserve Ratio
  • Formula: Loan loss reserve/Value of loans outstanding
  • Purpose: Indicates adequacy of reserves in relation to portfolio.
  • Definition: Loan loss reserve - reserve maintained to cover potential loan losses.


Number of Active Borrowers per Credit Officer
  • Formula: # of active borrowers/# of loan officers
  • Purpose:Indicated performance of loan officer and efficiency of methodology

Number of Active Borrowers per Management Staff
  • Formula: # of active borrowers/# of management personnel (excluding loan officers)
  • Purpose:Indicates performance of manager and efficiency of methodology.

Portfolio per Credit Officer
  • Formula: Value of loans outstanding/# of loan officers.
  • Purpose: Indicates potential financial productivity of loan officer.

Cost per Unit of Money Lent
  • Formula: Operating costs/total amount disbursed
  • Purpose: Indicates efficiency in distributing loans (in monetary terms).

Cost per Loan Made
  • Formula: Operating costs/# of loans made
  • Purpose: Indicates efficiency in disbursing loans.


Return on Performing Assets
  • Formula: Financial income/average performing assets
  • Purpose: Indicates financial productivity of credit services and investments activities.
  • Definition: Financial income - revenues from assets such as loans, investments and securities less borrowing expense. Generally includes fee income and generally excludes extraordinary items.

Return on Average total assets
  • Formula: Financial income/average total assets
  • Purpose:Parallels the Return on Performing Assets, yet includes non performing assets.

Financial Cost Ratio
  • Formula: Financial costs/average performing assets
  • Purpose: Shows costs of funds: affected by mix of net worth, soft loans and hard loans.
  • Definition: Financial costs (interest expense) - cost generated from liabilities such as deposits, debt outstanding, capital costs and other short term liabilities.

Administrative Cost Ratio
  • Formula: Administrative expenses/Average performing assets
  • Purpose: Key indicator of efficiency of lending operations
  • Definition: Administrative expenses - costs associated with managing the institution such as salaries, rent and also depreciation.

Operating Self-Sufficiency Ratio
  • Formula: Financial Income/Financial and administrative expenses + Provisions
  • Purpose: Shows ability of institution to cover costs of operations which includes financial and non-financial expenses with internally generated income.
  • Definition: Provisions - periodic loan loss allocations to the reserve account.

Financial Self-Sufficiency Ratio
  • Formula: Financial income/financial and administrative expenses + provisions + (Imputed cost of capital including grants and donations).
  • Purpose: Shows ability of institution to be fully sustainable in the long-run by covering all operating costs and maintaining value of capital.
  • Definition: Imputed cost of capital - estimated return required for capital in the specific market.


Current Ratio
  • Formula: For a six month period - projected cash inflow/projected cash outflow
  • Purpose: Shows ability of institution to meet projected near term obligations.

Authors (in alphabetical order):
  • David Butts
  • Thomas Coleman
  • Christina Dimolina
  • Laurie Herrick
  • Nancy McDonnell
  • Kathy Weber
Contact person -
David Butts
Tokyo Bureau Chief, Bloomberg Business News
Inokashira 4-23-11, Mitaka, Tokyo - 181, Japan
Tel: (81-3) 3201-8952
Fax: (81-3) 3201-8951

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Hari Srinivas - hsrinivas@gdrc.org
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