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Measuring performance of microfinance institutions a framework for reporting, analysis, and monitoring
1. “ Measuring Performance of Microfinance Institutions: A Framework for Reporting, Analysis, and Monitoring” Developed by the SEEP Network Financial Services Working Group and Alternative Credit Technologies, LLC
Presenter’s Notes Time: 0.5 minutes - Give brief overview of the topics you will cover during this presentation
Presenter’s notes Time: 1 minute May also mention the following as you go through each bullet point: Purpose – Provide a comprehensive financial reporting framework to MFIs that lack one or that wish to align their existing framework with industry-standard terms, ratios and adjustments. Assist MFI managers in developing consistent performance monitoring system based on IFRS Assist them in making decisions based on good information and analysis Inform boards of directors, donors, investors, others Focus is on MFI practitioners; but can also be useful to auditors, raters, networks. History: Early 1990’s: standards began to emerge for stronger financial management and especially management and reporting of delinquency 1995 paper also called “Blue Book” or “Ratios Monograph”. Contributed greatly to the development and adoption of financial reporting standards in microfinance. Why was “Financial Definitions Guidelines” document developed? Many terms continued to differ in name and content among MFIs, leading to confusion and distortions when comparing MFIs. Thus, this document defined nearly 50 financial terms and provided calculation guidelines for 20 ratios. Why was this Framework developed? Several terms were not included in definitions document Framework goes beyond definitions to include sample financial statements and report templates, suggest calculations for adjustments and make recommendations on which indicators to monitor.
Presenter’s Notes Time: 1 minute As you go through each bullet, you may point out the following: FUTURE: Explain that this document is first step in larger Microfinance Performance Standards project by SEEP Mention Purpose of Microfinance Standards Committee – create a forum for discussing changes in standards over time and to revise and add to the standards presented in the document. Comprised of MFIs, donors, rating agencies. Any amendments or additions decided on by the committee will be included in future editions of the framework. EDITIONS: Mention that there will be a limited number of each edition printed so that the framework can be updated based on the decisions of the standards committee. This will ensure that the framework keeps up to date. USE: Point out that to use the framework, the user should be familiar with microfinance institutions and have basic knowledge of accounting and financial reporting; Point out that framework is not meant to substitute local external reports that may be required by local authorities.
Presenter’s notes Time: 2 minutes HAND OUT SAMPLE FINANCIAL STATEMENTS AND REPORTS. AS YOU GO THROUGH THIS SLIDE, POINT OUT THE FOLLOWING: Mention that statements are the primary means for an institution to express its financial activities Because an MFI’s core business is the provision of financial services, the financial statements and reports are very similar to those of traditional financial institutions. The fifth report is not a traditional statement, but in order to complete the framework this report is necessary because it contains data not found in any of the other reports, but that is needed to calculate ratios and adjustments,. Framework does not include the Statement of Changes in Equity Position which is common in for-profit MFIs. Statements include the minimum breakdown of financial information needed to complete the overall Framework. Formats have been reviewed for IFRS compliance and no material conflict exists.
Presenter’s notes Time: When explaining that the income statement is a flow statement, point out that the income statement is like a movie: shows what happened in terms of revenue and expenses over a period of time. Operating Accounts include all revenue and expenses that are directly related to the MFI’s core business of making loans, accepting deposits, borrowing funds, and providing other financial services Non-operating accounts include all revenue and expenses that result from activities outside the MFI’s core financial business, such as training or the sale of merchandise. Donations and grant funds are also considered to be non-operating revenue. Point them to look at Income Statement Handout. Give example of Income Statement Detail (next slide)
Presenter’s notes Time: Go through the example, explaining each column: REF column – I is the letter that identifies Income statement items throughout the Framework. Account Name – term Definition – framework follows definitions guidelines where available. If the guidelines did not define an account, the framework does.
Presenter’s notes Time: When explaining that Balance Sheet is a stock statement, give the metaphor of it being like a picture (compared to the Income statement, which is like a movie) Assets: examples of what the MFI has are: investments, vehicles. Examples of what the MFI is owed: microloans, interest receivable. Liabilities: examples are borrowings, deposits Equity: it’s the MFI’s net worth; the difference between assets and liabilities
Presenter’s notes Time: Might also add the following explanations: Short term assets and liabilities include any portion of a long-term asset of liability that is receivable or payable within a year, even if the final maturity date is more than a year from the report date The framework’s presentation of gross loan portfolio in a single account si to follow IAS: most useful approach of the classification of assets and liabilities is to group them first by type and second by maturity. The reason for not classifying investments as ST and LT is that IFRS dictate that an MFI’s use or intended use of a financial asset is more relevant than its actual maturity. For example, an MFI might hold a long-term treasury note for only a few months for liquidity management. Therefore, to classify it as a long-term financial instrument is misleading.
Presenter’s notes Time: Point them to look at the balance sheet format in the handouts. B is the letter that identifies Balance Sheet accounts throughout the Framework. Explain that for each line in the report format, there is a detailed definition such as the one in the example in this slide.
Presenter’s notes Time: - You may elaborate on the second bullet by explaining: Operating Activities: cash receipts and payments related to the MFI’s ongoing provision of financial services. Includes lending and deposit services Investing Activities: cash receipts or outlays for acquiring or selling Fixed Assets or financial investments Financing Activities: borrowing and repayment of borrowings, the sale and redemption of Paid-in Capital and the payment of dividends
Presenter’s notes Time: Framework includes 2 options to prepare the Cash Flow Statement: Direct method Indirect method Direct Method is the most intuitive of the methods
Presenter’s notes Time: 1 minute Point them to look at the direct cash flow format in the handouts. C is the letter that identifies Cash Flow accounts throughout the Framework. If an MFI uses cash accounting, many of the cash flow accounts will have the same value as income statement and balance sheet accounts.
Presenter’s notes Time: 1 minute Slide is self-explanatory
Presenter’s notes Time: 0.5 minutes Point them to look at the indirect cash flow format in the handouts. Many of the accounts used for the indirect cash flow statement are the same as those in the direct cash flow statement.
Presenter’s notes Time: 0.5 minutes - Slide is self-explanatory
Presenter’s notes Time: 2 minutes Say that the format of the portfolio report is very likely to vary among MFI’s but should include the 3 things in the first bullet. Explain the difference between PAR and Arrears and why PAR is the preferred measure of portfolio quality: Arrears measure the sum of all past due payments PAR is the TOTAL value of loans outstanding that have one or more past due payments, a much larger amount Delinquency may refer to either, and leads to confusion PAR is the recommended measure of portfolio quality. Depending on how you’re doing on time, you may explain the following: MFIs should have a policy for calculating and creating an Impairment Loss Allowance and writing off loans. The generally accepted method for MFIs to assess default risk is based on the timeliness of principal payments on loans. The assumption is that the longer a loan remains past due, the more at risk the outstanding balance of the loan will become. Therefore, the remaining outstanding balance is referred to as Portfolio at Risk.
Presenter’s notes Time: 0.5 minutes Point them to look at the portfolio report format in the handouts. P is the letter that identifies Portfolio Report items throughout the Framework
Presenter’s notes Time: 1 minute - This report includes data on products and clients served by the institution, as well as data on the resources used to serve them. Point them to look at the non-financial data report in the handouts. N is the letter that identifies Non-Financial Data Report items throughout the Framework
Presenter’s notes Time: 2 minutes AS YOU GO THROUGH EACH BULLET, POINT OUT THE FOLLOWING: MAPPING ACCOUNTS It is very common that different MFI’s use different names for accounts (example: revenue vs. income). The definitions presented with the account name should help the user match an MFI’s accounts to this framework. ADDING ACCOUNTS Framework allows the user to add any sub accounts they wish. For example: sub-accounts under “Other administrative expense”. . SEGREGATING FS and NFS: FRAMEWORK RECOMMENDS THAT: If non-financial services account for a small portion of the MFI’s activities (that is, if they do not require significant fixed assets or if the services, such as training, are mandatory to receive loans), classifying all income and expenses related to these activities as non-operating items may make sense. If non-financial operations are significant, a manager should allocate costs among different programs and develop segregated financial statements that treat the financial service operations as a separate business. HOW FINANCIAL STATEMENTS ARE LINKED Mention that the document includes a box that explains the primary connections among the statements. Understanding these linkages can be helpful when analyzing the statements.
Presenter’s notes Time: 1 minute This slide is self-explanatory.
Presenter’s notes Time: 3 minutes - First bullet: Mention that there is a trade-off between precision of data and cost of gathering it. Finding the most accurate data for true performance may require the MFI to spend more time and money in data collection. For benchmarking, the data proposed by this FRAMEWORK can be obtained fairly easily and at a minimum cost to an MFI - For the last bullet, mention that monthly averages should be used where possible.
Presenter’s notes Time: 2 minutes AS YOU GO THROUGH THIS SLIDE, YOU MAY POINT OUT THE FOLLOWING: Give example of difference between true performance analysis and benchmarking, using subsidized cost of funds adjustment: For true performance, the adjustment for subsidized cost of funds should use a rate at which the MFI could actually borrow in the market. For benchmarking, the adjustment should use a minimum rate such as the Discount Rate (rate at which central banks lend to deposit-taking institutions for liquidity purposes). For True performance, mention that it can be a very detailed exercise and involves myriad choices. Many variations exist given the different environments in which MFIs operate. Therefore, the framework demonstrates these adjustments by providing a general formula and working through one example for a fictitious MFI. Each MFI should determine the variables that are most appropriate for its own environment. For benchmarking, mention that the framework follows the methodology used by the Microbanking Bulletin and thus the user can use the framework and then use the results to compare its performance to the benchmarks published regularly in the Microbanking Bulletin.
Presenter’s notes Time: 1.5 minutes When taking about #2, Differences in calculation methodologies, mention that there can be differences arising from: The accounts used for the adjustment The period for which the adjustment is made The rate used in calculating the adjustment The adjustment formula As a result of these differences, the framework recommends disclosing the information used to make adjustments when presenting adjusted financial statements and presents a sample disclosure table. Point them to the summary of adjustments table in the handouts and say that you’re going to go through an example of how adjustments are presented, using Subsidized Cost of funds adjustment.
Presenter’s notes Time: 1 minute A is the letter that is used throughout the document to identify Adjustments. Each adjustment has a detailed description. This is the example from A1: Subsidized Cost of Funds Adjustment
Presenter’s notes Time: 1 minute Each adjustment includes a table such as this one, which points out the different methodologies (accounts, rates, etc). that are commonly used to calculate the adjustment. This is the example for A1.
Presenter’s notes Time: 1 minute Each adjustment presents the formula used to calculate it, and also points out if there are different methodologies for the formula. This is the example for A1. In this case, the formula is the same for all adjustments methodologies analyzed.
Presenter’s notes Time: 2 minutes Go through the example for true performance analysis using A1: Subsidized cost of funds. Slide is self-explanatory.
Presenter’s notes Time: 2 minutes Point out that for the True Performance Analysis, the framework presents boxes with an example from a fictitious MFI. Go through the example for A1: Subsidized cost of funds
Presenter’s notes Time: 1 minutes This slide shows the example definition and formula for the benchmarking subsidized cost of funds adjustment. Go through the slide (self-explanatory)
Presenter’s notes Time: 2 minutes For each adjustment, the framework also recommends how to perform a standard for benchmarking. This is the example for A1: Subsidized cost of funds adjustment
Presenter’s notes Time: 2 minutes -For the benchmarking adjustments, the framework presents a table for how to calculate the benchmarking adjustment, step by step.
Presenter’s notes Time: 1 minute AS YOU GO THROUGH THIS SLIDE, YOU MAY POINT OUT THE FOLLOWING: Mention that there is a table in the framework document that summarizes the effects of adjustments. (table 3.11)
Presenter’s notes Time: 1 minutes - Slide is self-explanatory
Presenter’s notes Time: 2 minutes AS YOU GO THROUGH THIS SLIDE, START BY POINTING OUT THE FOLLOWING: Explain that this chapter begins by listing the term for each ratio, its formula and an explanation of its purpose. Then, each ratio is discussed in the context of its group, including a brief introduction to each group and a definition of each ratio. Go through each of the groups of ratios and say that the ratios in the Framework provide a multidimensional perspective on the financial health of the lending and savings operations of the institution. Ratios must be analyzed together because selective ratio use can create an incomplete picture.
Presenter’s notes Time: 1 minute THIS IS JUST A CONTINUATION OF THE PREVIOUS SLIDE. CONTINUE GOING THROUGH THE LIST OF RATIOS IN EACH GROUP. Point them to the handout showing the Summary of the SEEP 18. Remind them that ratios are expressed as an annualized number of %. If a manager is calulating monthly or quarterly ratios, he/she must consider issues related to averaging and annualizing, discussed earlier in Chapter 1. Each ratio can be derived either from the financial statements and reports presented in Ch. 2 or if the MFI is able to complete the adjustments in Ch 3, the ratios can be derived from the adjusted financial statements.
Presenter’s notes Time: 2 minutes Explain that you will now go through an example of how the ratios are explained, using Return on Assets. This slide shows the example for the formula and why this ratio is important using ROA
Presenter’s notes Time: 2 minutes Each ratio has a section showing the effect of adjustments This is the example for ROA
Presenter’s notes Time: 2 minutes AS YOU GO THROUGH THIS SLIDE, POINT OUT THE FOLLOWING: Without analysis, creating financial statements is just an accounting exercise. Financial analysis is the art of interpreting financial statements and indicators; looking at past performance to make today’s decisions. Trend Analysis Examining a company’s financial statements and indicators over time to determine how actions affect results. Compare current period to a previous period of the same length OR annualize indicators for the current period and compare to the previous year’s indicators. Variance Analysis Compares actual performance to projected performance To measure management’s success or failure in meeting its goals Benchmarking Comparing one institution’s performance to that of its peers. Requires caution because local conditions, institutional characteristics, and management choices affect institutional performance. Importance of relevant peer groups. Sample number is important so that averages and median calculations are not misleading.
Presenter’s notes Time: 3 minutes Performance Monitoring Reports Performance monitoring reports are NOT are replacement for financial statements or annual reports. Rather, they combine important data – accounts, ratios, and indicators – that are important to the user. Mention that framework provides sample reports that MFIs may find useful when designing reports for themselves, their board, donors, and investors. For each audience, management must determine what information is needed and how frequently. SAMPLES: Point them to Sample Monthly Management Report. Variance or % achieved analysis is suggested here. Trend analysis is also suggested but for comparing current period with the same period in the previous year to make meaningful comparison. Benchmarking analysis is hard for monthly analysis because benchmarks are usually based on annual data. Quarterly Reports (at a minimum, adjusted financial statements, including a portfolio report and a set of SEEP 18. Point them to Sample Revenue Analysis and Asset Allocation Analysis. Point them to Sample Quarterly Management Report Point them to Sample Quarterly Board Report Should provide adjusted financial statements on a quarterly basis, a portfolio report, and a full set of SEEP 18 ratios. Short summary report with key data and analysis. Point them to Sample Semi-annual donor, creditor, investor report As part of grant, loan or investment agreement, managers should determine which key data should be provided to investors and lenders and with what frequency Consider providing summarized income statement and balance sheet information and key ratios.
Presenter’s notes Time: 1 minute Till, I’m not really sure about bullets 1, 2 and 4. Can you please add the presenter’s notes for those points? FRAME tool: A tool developed in EXCEL that will allow the user to input data into the formats of the framework, calculate adjustments and ratios and generate the performance reports suggested in the framework. Will be used in training Will allow for 3 years of data Will allow for monthly/quarterly/annual input. Status of the tool: Pilot will be ready for testing in June 2005. 3 pilot trainings will take place between June and August. Final tool will be ready in September 2005.
Presenter’s notes IF TIME ALLOWS, TAKE QUESTIONS FROM THE AUDIENCE.
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