PARTICIPANT COURSE MATERIALS

Financial Analysis for Microfinance

Institutions

CONSULTATIVE GROUP TO ASSIST THE POOR

NOTE The participant course materials contain the main technical messages and concepts delivered in this course. It is not
intended to serve as a substitute for the full information and skills delivered through the individual courses Skills for
Microfinance Managers training series. During the actual courses, key concepts are presented with case studies, exchange of
participant experiences and other activities to help transfer skills. Users interested in attending a training course should directly
contact CGAP hubs and partners for course dates and venues. CGAP would like to thank those who were instrumental to the
development and design of the original course that led to this participant summary and to its update in 2008: Janis Sabetta,
Michael Goldberg, Ruth Goodwin-Groen, Lorna Grace, Brigit Helms, Jennifer Isern, Joanna Ledgerwood, Patricia Mwangi, Bridge
Octavio, Ann Wessling, Djibril Mbengue, Tiphaine Crenn and all CGAP training hubs and partners. Copyright 2009, The
Consultative Group to Assist the Poor (CGAP).
Overview 

Overview and Goals of the Course  ........................................................................................ 4

Financial Statements  ............................................................................................................ 7
Balance Sheet........................................................................................................................... 7
Income Statement..................................................................................................................... 8
Cash Flow Statement ................................................................................................................. 9
Portfolio Report and Activity Report............................................................................................ 10
Non-Financial Data Report ........................................................................................................ 10
Formatting Financial Statements  ........................................................................................ 12
Indicators for Financial Analysis  ......................................................................................... 17
Portfolio Quality .................................................................................................................. 20
Rationale for Loan Loss Impairment and Impairment Loss Allowance ............................................. 24
Accounting for Loan Loss Impairment and Write-Offs.................................................................... 25
Analytical Adjustments  ....................................................................................................... 27
Asset /Liability Management  ............................................................................................. 31
Efficiency and Productivity .................................................................................................. 36
Sustainability and Profitability  ............................................................................................ 40
Use of Ratios ............................................................................................................................ 44
Overview and Goals of the Course 

Overview
International best practice in microfinance around the world suggests good financial
analysis is the basis for successful and sustainable microfinance operations. Some would
even say that without financial analysis your MFI will never achieve sustainability.

Sustainability means relying on commercially priced and internally generated funds rather
than on donors for growth.
 Sustainability =

Coverage of financial expense (cost of funds + inflation) +

Loan loss +

Operating expenses (personnel +admin expenses) +

Capitalization for growth from financial revenue

Goals of the Course
• To master the tools needed for understanding the financial position and sustainability of
your institution.
• To use financial analysis to improve your institution’s sustainability, by
1. Identifying the components, purpose, relationships, and importance of the main
financial statement;
2. Learning the formats of income statements and balance sheets to easily separate
the effect of donor funds;
3. Analyzing financial statements to monitor profitability, efficiency, and portfolio
quality;
4. Adjusting costs for inflation, subsidized cost of funds, and in-kind donations; and
5. Identifying critical factors for moving toward financial sustainability.
Financial Statements 

MFIs commonly use four types of financial statements:

1. Balance sheet
2. Income statement
3. Cash flow statement
4. Portfolio report

Balance Sheet Assets = Liabilities + Equity

A balance sheet is a summary of the financial position at a specific point in time. It
presents the economic resources of an organization and the claims against those
resources.

Assets Liabilities Equity

• Represent what is owned by the
organization or owed to it by
others
• Are items in which an
organization has invested its
funds for the purpose of
generating revenue.
• Represent what is owed by the
organization to others.
• Represents the capital or net
worth of the organization.
• Includes capital contributions of
members, investors or donors,
retained earnings, and the current
year surplus.
Income Statement
An income statement reports the organization’s financial performance over a specified
period of time. It summarizes all revenue earned and expenses incurred during a
specified accounting period. An institution prepares an income statement so that it can
determine its net profit or loss (the difference between revenue and expenses).

Revenue Expenses
Refers to money earned by an organization for Represent costs incurred for goods and services
goods sold and services rendered during an used in the process of earning revenue. Direct
accounting period, including expenses for an MFI include

• Interest earned on loans to clients • Financial costs

• Fees earned on loans to clients • Administrative expenses
• Interest earned on deposits with a bank, etc. • Provision for loan impairment

An income statement
• Relates to a balance sheet through the transfer of cash donations and net profit (loss)
as well as depreciation, and in the relationship between the provision for loan
impairment and the impairment loss allowance.
• Uses a portfolio report’s historical default rates (and the current impairment loss
allowance) to establish the provision for loan impairment.
• Relates to a cash flow statement through the net profit/loss as a starting point on
the cash flow (indirect method).
• Starts at zero for each period (in contrast to the Balance Sheet which is cumulative
since the beginning of the organization’s operation).

Cash Flow Statement

A cash flow statement shows where an institution’s cash is coming from and how it is
being used over a period of time.
A cash flow statement

• Classifies the cash flows into operating, investing and financing activities.
o Operating activities: services provided (income-earning activities).
o Investing activities: expenditures that have been made for resources intended to
generate future income and cash flows.
o Financing activities: resources obtained from and resources returned to the
owners, resources obtained through borrowings (short-term or long-term) as
well as donor funds.
• Can use either
o The direct method, by which major classes of gross cash receipts and gross cash
payments are shown to arrive at net cash flow (recommended by IAS)
o The indirect method, works back from net profit or loss, adding or deducting
noncash transactions, deferrals or accruals, and items of income or expense
associated with investing and financing cash flows to arrive at net cash flow.

Note: The Balance Sheet and Income Statement are accounting reports. The figures can be influenced by management’s choices
regarding accounting policies. A Cash Flow Statement cannot be changed by any accounting policy.
Portfolio Report and Activity Report
A portfolio report and activity report link the loan portfolio information of the three
previously discussed statements—income statement, balance sheet, and cash flow. The
purpose of the portfolio report is to represent in detail an MFI’s microlending activity,
present the quality of the loan portfolio, and provide detail on how the MFI has
provisioned against potential losses. Unlike other statements, the design of this report
varies from MFI to MFI. The content, however, should be consistent and must include
the following:
• Portfolio activity information,
• Movement in the Impairment Loss Allowance, and
• A Portfolio Aging Schedule.

Non-Financial Data Report

In addition to the information collected in the preceding reports, important operational
and macroeconomic data must be captured to calculate key financial ratios. In order to
provide tools that will give managers and others a complete picture of an MFI’s financial
condition, the non-financial data report includes data on products and clients served by
the institution, as well as data on the resources used to serve them.
Relationships Between Financial Statements
Formatting Financial Statements 

Most MFIs depend on donor funds but do not realize to what extent and that donor money
is not limitless. We want to create financial statements that will show the impact of donor
funds on the MFI’s financial position and its relationship to sustainability.

So what’s different ?

• INCOME STATEMENT –
♦ Donor funds are treated “below the line.”
♦ Donor money is recorded after the net income (after taxes before donations).

• BALANCE SHEET –
There are three separate sources of equity from the income statement:
♦ Retained earnings/losses–current year (minus cash donations)
♦ Donations–current year
♦ Other equity accounts– including net nonoperating income

This is important because it allows one to see over time the proportion of equity that
is from the MFI itself versus the amounts contributed by donors.
 Three Ways in Which MFIs Treat Cash Donations
Goals: 1. Grants are separated from operating income
2. Grants are fully disclosed in equity
IAS 20 Recommends Income approach
Considerations: Where to record them
When to record them

Income Statement Balance Sheet

Operating Profit/Loss Assets Liabilities
All Cash Grants/Donations Equity
...for current year Donations
Current year
Operating Profit/Loss Assets Liabilities
Grants for Operations Equity
Donations
Grants for Loan Funds Current year
Grants for Fixed Assets
...for current year
 Sample Income Statement
Financial Revenue
Financial Revenue from Loan Portfolio
Interest on Loan Portfolio
Fees and Commissions on Loan
Portfolio
Financial Revenue from Investments
Other Operating Revenue
Financial Expense
Financial Expense on Funding
Liabilities
Interest and Fee Expense on Deposits Non-operating Expense
Interest and Fee Expense on
Borrowings
Other Financial Expense
Net Financial Income
Impairment Losses on Loans
Provision for Loan Impairment
Value of Loans Recovered
Source: SEEP Framework, 2005
Operating Expense
Personnel Expense
Administrative Expense
Depreciation and Amortization Expense
Other Administrative Expense
Net Operating Income
Net Non-operating
Income/(Expense)
Non-operating Revenue
Net Income (Before Taxes and
Donations)
Taxes
Net Income (After Taxes and Before
Donations)
Donations
Donations for Loan Capital
Donations for Operating Expense
Net Income (After Taxes and
Donations)
 Sample Balance Sheet
ASSETS Accounts Payable and Other Short-term
Liabilities
Cash and Due from Banks Long-term Time Deposits
Trade Investments Long-term Borrowings
Net Loan Portfolio Other Long-term Liabilities
Gross Loan Portfolio Total Liabilities
Impairment Loss Allowance EQUITY
Interest Receivable on Loan Portfolio Paid-In Capital
Accounts Receivable and Other Assets Donated Equity
Other Investments Prior Years
Net Fixed Assets Current Year
Fixed Assets Retained Earnings
Accumulated Depreciation and Prior Years
Amortization
Total Assets Current Year
LIABILITIES Reserves
Demand Deposits Other Equity Accounts
Short-term Time Deposits Adjustments to Equity
Short-term Borrowings Total Equity
Interest Payable on Funding Liabilities Total Liabilities + Equity

Source; SEEP Framework, 2005

 Financial analysis is required for many financial
management decisions:
• How to manage the finances to achieve the strategic goals of the institution

• How to increase profitability

• How to reach self-sufficiency/breakeven point

• How to increase efficiency especially reducing the cost per client

• What is the optimum level of each different operational expense including the cost of funds

• How to manage the costs of human resources as part of overall human resource management

• How to deal with the effect of inflation

• What is the loan impairment allowance policy

• What is the write-off and rescheduling policy

• What interest rate should the MFI charge on products?

• How to manage liquidity—i.e., how to keep solvent at the same time as disbursing the maximum

number of loans, setting a target level of liquidity

• What is the best financing structure, i.e., how much debt including from commercial sources and

how much capital do you need?

• What should the asset structure be?

• How to manage the fixed assets, i.e., the depreciation policy, how to finance them, are they insured,
are they safe?

• What are currency risks and can they be minimized?

• How to undertake trend analysis and to compare actual performance against planned performance
Indicators for Financial Analysis 

An MIS is created to generate information for decision making, the best

information for that purpose is in the concise form of a financial or management
indicator.
Waterfield and Ramsing, p. 39.

Indicators generally compare two or more pieces of data, resulting in a ratio that provides
more insight than do individual data points.

Sustainability and Profitability

• Operational Self-Sufficiency
• Financial Self-Sufficiency
• Return on Assets (ROA)
• Adjusted Return on Assets (AROA)
• Return on Equity (ROE)
• Adjusted Return on Equity (AROE)
Asset/Liability Management
• Yield on Gross Portfolio
• Portfolio to Assets
• Cost of Funds Ratio
• Adjusted Cost of Funds Ratio
• Debt to Equity
• Adjusted Debt to Equity
• Liquid Ratio

Portfolio Quality
• Portfolio at Risk (PAR) Ratio
• Adjusted Portfolio at Risk (PAR) Ratio
• Write-off Ratio
• Adjusted Write-off Ratio
• Risk Coverage Ratio
• Adjusted Risk Coverage Ratio
Efficiency and Productivity
• Operating Expense Ratio
• Adjusted Operating Expense Ratio
• Cost per Active Client
• Adjusted Cost per Active Client
• Borrowers per Loan Officer
• Active Clients per Staff Member
• Client Turnover
• Average Outstanding Loan Size
• Adjusted Average Outstanding Loan Size
• Average Loan Disbursed
Portfolio Quality 

Portfolio at Risk (PAR) and the Write-off Ratio are the preferred ratios for analysing
portfolio quality. The other ratios are more limited as noted in the ‘measurement’ column
below
.

INDICATOR RATIO MEASUREMENT

The most accepted
Unpaid Principal Balance of all loans with measure of portfolio
payments > 30 Days past due + Value of quality. The most
(R9)
Renegotiated Loans common international
Portfolio at Risk
Gross Loan Portfolio measurements of PAR are
PAR
> 30 days and > 90 days.
By Age
But can vary with terms
of loan.

Adjusted Unpaid Principal Balance of all loans
Adjusted PAR Ratio
with payments > 30 Days past due + Value of
Renegotiated Loans
Adjusted Gross Loan Portfolio
Value of Loans Written Off
Write-Off Ratio
Average Gross Loan Portfolio
Value of Loans Written Off + Write-off
Adjusted write off
Adjustment
ratio
Average Adjusted Gross Loan Portfolio
The adjusted PAR reduces
the Gross Loan Portfolio
by the Write-off
Adjustment.
Represents the percentage
of the MFI’s loans that has
been removed from the
balance of the gross loan
portfolio because they are
unlikely to be repaid. MFIs’
write-off policies vary;
managers are
 recommended to calculate
this ratio on an adjusted
basis.

Shows how much of the

Impairment Loss Allowance
portfolio at risk is covered
Unpaid Principal Balance of all loans with
Risk Coverage Ratio by the MFI’s Impairment
payments > 30 Days past due
Loss Allowance.

The adjusted ratio

Adjusted Impairment Loss Allowance
Adjusted risk incorporates the
Adjusted Unpaid Principal Balance of all loans
coverage ratio Impairment Loss
with payments > 30 Days past due – Write-off
Allowance Adjustment and
Adjustment
the Write-off Adjustment.
 Calculating Portfolio at Risk ratios
Ref. DESCRIPTION
R9 Portfolio at Risk
PAR > 30 Days
a
b Value of Renegotiated Loans
c a+b
d Gross Loan Portfolio
R9 PAR Ratio = c/d

Adj R9 Adjusted Portfolio at Risk Ratio

Adjusted PAR > 30 Days
a
b Value of Renegotiated
c a+b
d Adjusted Gross Loan Portfolio
Adj R9 Adjusted PAR Ratio = c/d

R10 Write-off Ratio

Value of Loans Written-off
a
b Average Gross Loan Portfolio
R10 Write-off Ratio = a/b
Adj R10 Adjusted Write-off Ratio
Value of Loans Written-off + Write-off Adjustment
a
b Average Adjusted Gross Loan Portfolio
Adj R10 Adjusted Write-off Ratio = a/b

R11 Risk Coverage Ratio

Impairment Loss Allowance
a
b Portfolio at Risk > 30 days
R11 Risk Coverage Ratio = a/b

Adj R11 Adjusted Risk Coverage Ratio

Adjusted Impairment Loss Allowance
a
b Adj PAR > 30 days - Write-off Adjustment
Adj R11 Adjusted Risk Coverage Ratio = a/b
 Rationale for Loan Loss Impairment and
Impairment Loss Allowance
Maintaining loans on the books that are unlikely to be repaid overstates the value of the
portfolio.

IMPAIRMENT LOSS ALLOWANCE

is an account that represents the amount of outstanding principal that is not expected to
be recovered by a micro-finance organisation

it is a negative asset on the Balance Sheet and reduces the Gross Loan Portfolio. (An
alternative presentation is to show it as a liability.)

PROVISION FOR LOAN IMPAIRMENT

is the amount expensed on the Income and Expenses Statement.

↑ It increases the Impairment Loss Allowance

LOAN LOSSES or WRITE-OFFs
occur only as an accounting entry. They do not mean that loan recovery should not
continue to be pursued.

↓ They decrease the Impairment Loss Allowance and the Gross Loan
Portfolio

Accounting for Loan Loss Impairment and Write-Offs

An impairment loss allowance indicates the possibility that an asset in the Balance Sheet is not 100%
realizable. The loss of value of assets may arise through wear and tear such as the depreciation of
physical assets, loss of stocks, or unrecoverable debts.

The provision for loan impairment expenses the anticipated loss of value in the portfolio gradually over
the appropriate periods in which that asset generates income, instead of waiting until the actual loss of
the asset is realized.

Provisions are only accounting estimates and entries, and they do not involve a movement of cash, like
saving for a rainy day.

A provision for loan impairment charged to a period is expensed in the Income Statement. The
corresponding credit accumulates over time in the Balance Sheet as an allowance shown as a negative
asset:

The accounting transaction is:

Dr Provision for loan impairment

Cr Impairment loss allowance

Loan losses or write-offs occur when it is determined that loans are unrecoverable. Because the
possibility that some loans would be unrecoverable has been provided for in the accounting books through
allowances, loan losses are written off against the impairrment loss allowance and are also removed from
the gross loan portfolio.

The accounting transaction is:

Dr Impairment loss allowance

Cr Gross loan portfolio

Write-offs do not affect the net portfolio outstanding unless an increase in the impairment loss allowance

is made. When write-offs are recovered, they are booked in the Income Statement as Value of Loans

Recovered which reduces the Provision amount.

Adapted from: Joanna Ledgerwood. Financial Management Training for Microfinance Organizations, Calmeadow, 1996.
Analytical Adjustments 

Adjustments are additional, or hidden, costs incurred by the MFI that we need to recognize
for internal management purposes, for example, when calculating and analyzing efficiency
and profitability ratios. They are not to be included in the audited financial statements;
they are internal adjustments.
Which costs does an MFI incur that are not reflected in the expenses?
•Subsidies
•Inflation
•Portfolio at risk
REF. ACCOUNT EXPLANATION FORMULA
NAME
1. Subsidies
Examines the difference between {(Average Short-term
Subsidized an MFI’s financial expense and the Borrowings + Average Long-term
A1 financial expense it would pay if all Borrowings) x Market Rate for
Cost of Funds its funding liabilities were priced at Borrowing} – Interest and Fee
market rate. Expense on Borrowings
The difference between what the
MFI is actually paying for a
donated or subsidized good or
service and what it would have
to pay for the same good or Period Estimated Market Cost of
A2 In-kind Subsidy service on the open market.. [Accounts] – Period Actual Cost
Common examples of these in- of [Accounts]
kind subsidies are computers,
consulting services, free office
space, and free services of a
manager.
2. Inflation
The rationale behind the inflation
adjustment is that an MFI should,
at a minimum, preserve the value
of its equity (and shareholders
investments) against erosion due (Equity, Beginning pg Period x
to inflation. In addition, this Inflation Rate) – (Net Fixed
A3 Inflation
adjustment is important to Assets, Beginning pf Period x
consider when benchmarking Inflation Rate)
institutions in different countries
and economic environments.
Unlike subsidy adjustment,
recording an inflation adjustment
 is common in many parts of the
world and is mandated by Section
29 of the International Accounting
Standards (IAS) in high inflation
economies.
3. Portfolio at Risk
Intended to bring as MFI’s
Gross Loan Portfolio x [Allowance
Impairment Impairment Loss Allowance in line
A4 Rated] – (Impairment Loss
Loss Allowance with the quality of its Gross Loan
Allowance)
Portfolio.
Intended to identify loans on an
MFI’s books that by any
reasonable standard should be
written-off. This adjustment can
A5 Write-off significantly reduce the value of Portfolio at Risk > 180 days
an MFI’s assets if persistent
delinquent loans are not counted
as part of the gross loan
portfolio.

Calculating Adjustments
DESCRIPTION
Adjustment for Subsidized
A1 Cost of Funds
a. Average Short-term Borrowings
b. Average Long-term Borrowings
c. Average Loang and Short Term Borrowings
d. Market Rate, End of Period
 e. Market Cost of Funds = c x d
f. Interest and Fee Expense on Borrowings
g. Adjustment for Subsidized Cost of Funds =e - f
Adjustment for In-kind
A2 Subsidies
a. Personnel Expense
b. Administrative Expense
c. Adjustment for In-kind Subsidies = a + b
A3 Inflation Adjustment
a. Equity, Beginning of Period
b. Inflation Rate
c. Inflation Adjustment to Equity = (a x b)
d. Net Fixed Assets, Beginning of Period
e. Inflation Adjustment to Fixed Assets = (d x b)
f. Net Adjustment for Inflation = c - e

Adjustment for Impairment

A4 Loss Allowance
a. Adjusted Impairment Loss Allowance
b. Actual Impairment Loss Allowance
c. Adjustment to Impairment Loss Allowance = a - b >0

A5 Adjustment for Write-off

PAR > 180 days Past Due
Asset /Liability Management 

Asset/ Liability Management is the ongoing process of planning, monitoring and

controlling the volumes, maturities, rates and yields of assets and liabilities. The basis of
financial intermediation is the ability to manage assets (the use of funds) and liabilities
(the source of funds). Asset/liability management is required on the following levels:

• Interest Rate Management: The MFI must make sure that the use of funds generates
more revenue than the cost of funds.

• Asset Management: Funds should be used to create assets that produce the most
revenue (are most “productive”).

• Leverage: The MFI seeks to borrow funds to increase assets and thereby increase
revenue and net profit. The term leverage indicates the degree to which an MFI is using
borrowed funds. At the same time, the MFI must manage the cost and use of its
borrowings so that it generates more revenue than it pays in Interest and Fee Expense
on those borrowings.

• Liquidity Management: The MFI must also make sure that it has sufficient funds
available (“liquid”) to meet any short-term obligations.
 Asset/Liability Management Ratios
Interest rate management

Yield on gross Cash Received from Interest, Fees and

Portfolio Commissions on Loan Portfolio
Average Gross Loan Portfolio

100% - Cash Revenue from Loan Portfolio

Yield gap Net Loan Portfolio x Expected Annual Yield

Financial Expense on Funding Liabilities

Cost of Funds
(Average Deposit + Average Borrowing)

Adjusted Financial Expense on Funding

Liabilities
Adjusted Cost of
(Average Deposit + Average Borrowing)
Funds

Asset Management

Portfolio to Gross Loan Portfolio

Assets Assets
 Leverage
Debt/Equity Liabilities
Equity

Adjusted Liabilities
debt/Equity Adjusted Equity

Liquidity Management
Cash + Trade Investments
Current Ratio Demand Deposit + Short-term Time
Deposit + Short-term Borrowing +
Interest Payable on Funding Liabilities +
Accounts Payable and Other Short-term
Liabilities)
 Calculating Asset/Liability Management Ratios
Ref. DESCRIPTION
R4 Yield on Gross Portfolio Ratio = a/b
a Cash Received from Interest, Fees,and Commissions on Loan Portfolio
b Average Gross Loan Portfolio
R4 Yield on Gross Portfolio Ratio = a/b

R5 Portfolio to Assets Ratio

a Gross Loan Portfolio
b Assets
R5 Portfolio to Assets Ratio = a/b

R6 Cost of Fund Ratio

a Financial Expenses on Funding Liabilities
b Average Deposits
c Average Borrowings
d b+c
R6 Cost of Fund Ratio = a/d

Adj
R6 Adjusted Cost of Fund Ratio
a Adjusted Financial Expenses on Funding Liabilities
b Average Deposits
c Average Borrowings
d b+c
Adj
R6 Adjusted Cost of Fund Ratio = a/d
R7 Debt to Equity Ratio
a Liabilities
b Equity
R7 Debt to Equity Ratio = a/b
Adj
R7 Adjusted Debt to Equity Ratio
a Liabilities
b Adjusted Equity
Adj
R7 Adjusted Debt to Equity Ratio = a/b

R8 Liquid Ratio Ratio

a Cash
b Trade Investments
c a+b
d Demand Deposits
e Short-term Deposits
f Short-term Borrowings
g Interest Payable on Funding Liabilities
h Account Payable and Other Short-term Liabilities
i d+e+f+g+h
R8 Liquid Ratio Ratio = c/i
Efficiency and Productivity 

Efficiency is related to Productivity in terms of serving clients and keeping costs low.

RATIO FORMULA EXPLANATION

Operating Expense Operating Expense Highlight personnel and
Ratio Average Gross Loan Portfolio administrative expenses relative to
the loan portfolio the most
commonly used efficiency indicator.

Adjusted Operating
Expense Ratio Adjusted operating Expense The adjusted ratio usually increases
Average Adjusted Gross Loan Portfolio this ratio when the affect of
subsidies are included.
Cost per Active Operating Expense Provides a meaningful measure of
Client Average Number of Active Clients efficiency for an MFI, allowing it to
determine the average cost of
maintaining an active client.

The adjusted ratio usually increase

Adjusted Cost per Adjusted Operating Expense this ratio when the affect of
Active Client Average Number of Active Clients subsidies are included.

Measures the average caseload of

Borrowers per Loan Number of Active Borrowers
(average number of borrowers
Officer Number of Loan Officers
managed by) each loan officer.
 The overall productivity of the MFI’s
Active Clients per Number of Active Clients
personnel in terms of managing
Staff Member Total Number of Personnel
clients, including borrowers,
voluntary savers, and other clients.
Number of Active Clients, beginning of
Measures the net number of clients
period + Number of New Clients during
continuing to access services during
Client Turnover period – Number of Active Clients, end of
the period; used as one
period
measurement of client satisfaction.
Average Number of Active Clients
Average Gross Loan Portfolio Measures the average outstanding
Outstanding Loan Number of Loans Outstanding loan balance per borrower. This
Size ration is a profitability driver and a
measure of how much of each loan
is available to clients.

Adjusted Average
Outstanding Loan Adjusted Gross Loan Portfolio The adjusted ratio incorporates the
Size Adjusted Number of Loans Outstanding Write-off Adjustment.

Measures the average value of each

loan disbursed. This ratio is
Average Loan
Value of Loan Disbursed frequently used to project
Disbursed
Number of Loans Disbursed disbursements. This ratio or R17
can be compared to (N12) GNI per
capita.
Calculating Efficiency and Productivity Ratios
Ref. DESCRIPTION
R12 Operating Expense Ratio
a Operating Expense
b Average Gross Loan Portfolio
R12 Operating Expense Ratio = a/b

Adj R12 Adjusted Operating Expense Ratio

a Adjusted Operating Expense
b Average Adjusted Gross Loan Portfolio
Adj R12 Adjusted Operating Expense Ratio = a/b

R13 Cost per Active Client Ratio

a Operating Expense
b Average Number of Active Clients
R13 Cost per Active Client Ratio = a/b

Adj R13 Adjusted Cost per Active Client Ratio

a Adjusted Operating Expense
b Average Number of Active Clients
Adj R13 Adjusted Cost per Active Client Ratio = a/b

R14 Borrowers per Loan Officer Ratio

a Number of Active Borrowers
b Number of Loan Officers
R14 Borrowers per Loan Officer Ratio = a/b

R15 Active Clients per Staff Member Ratio

a Number of Active Clients
b Total Number of Personnel
R15 Active Clients per Staff Member Ratio = a/b
 R16 Client Turnover Ratio
a Number of Active Clients, beginning of period
b Number of New Clients during period
c Number of Active Clients, end of period
d Average Number of Active Clients
R16 Client Turnover Ratio = (a+b-c)/d

R17 Average Outstanding Loan Size Ratio

a Gross Loan Portfolio
b Number of LoanOutstanding
R17 Average Outstanding Loan Size Ratio = a/b

Adj R17 Adj Average Outstanding Loan Size Ratio

a Adjusted Gross Loan Portfolio
b Number of LoanOutstanding - Write-off Adjustment
Adj R17 Adj Average Outstanding Loan Size Ratio = a/b

R18 Average Loan Disbursed Ratio

a Value of Loans Disbursed
b Number of Loan Disbursed *)
R18 Average Loan Disbursed Ratio = a/b
Sustainability and Profitability 

Profitability and sustainability ratios reflect the MFI’s ability to continue operating and
grow in the future.

RATIO FORMULA EXPLANATION

Operational Self- _Financial Revenue_ Measures how well
Sufficiency (Financial Expense + Impairment Losses on Loans + a MFI can cover its
Operating Expense) costs through
operating
revenues.

Measures how well

Financial Self- _Adjusted Financial Revenue_ a MFI can cover its
Sufficiency costs taking into
(Adjusted Financial Expense + Adjusted Impairment
account
Losses on Loans + Adjusted Operating Expense)
adjustments to
operating revenues
and expenses.

Return on Assets _Net Operating Income - Taxes_ Measures how well

(ROA) Average Assets the MFI uses its
assets to generate
returns. This ratio
is net of taxes and
excludes non-
operating items
Adjusted Return on _Adjusted Net Operating Income - Taxes_ and donations.
Assets (AROA) Average Adjusted Assets

_Net Operating Income - Taxes_ Calculates the rate

Average Equity of return on the
average Equity for
the period.
Return on Equity
Because the
(ROE)
numerator does not
_Adjusted Net Operating Income - Taxes_ include non-
Adjusted Return on operating items or
Average Adjusted Equity donations and is
Equity (AROE)
net of taxes, the
ratio is frequently
used as a proxy for
commercial
viability.
Calculating Sustainability and Profitability Ratios
Ref. DESCRIPTION
R1 Operational Self-Sufficiency Ratio
a Financial Revenue
b Financial Expense
c Impairment Losses on Loans
d Operating Expense
e b+c+d
R1 Operational Self-Sufficiency Ratio = a/e

Adj
R1 Financial Self-Sufficiency Ratio
a Financial Revenue
b Adjusted Financial Expense
c Adjusted Impairment Losses on Loans
d Adjusted Operating Expense
e b+c+d
Adj
R1 Financial Self-Sufficiency Ratio = a/e

R2 Return on Assets (ROA)

a Net Operating Income
b Taxes
c a-b
d Average Assets
R2 Return on Assets (ROA) = c/d

Adj
R2 Adjusted Return on Assets (AROA)
a Adjusted Net Operating Income
b Taxes
c a-b
 d Adjusted Average Assets
Adj
R2 Adjusted Return on Assets (AROA) = c/d

R3 Return on Equity (ROE) = c/d

a Net Operating Income
b Taxes
c a-b
d Average Equity
R3 Return on Equity (ROE) = c/d

Adj
R3 Adjusted Return on Equity (AROE) = c/d
a Adjusted Net Operating Income
b Taxes
c a-b
d Adjusted Average Equity
Adj
R3 Adjusted Return on Equity (AROE) = c/d
Use of Ratios

Ratio analysis is a financial management tool that enables managers of

microfinance institutions to assess their progress in achieving sustainability.

They can help answer two primary questions that every institution involved in
microfinance needs to ask.
Is this institution either achieving or progressing towards profitability?
How efficient is it in achieving its given objectives?

Taken together, the ratios in the framework provide a perspective on the

financial health of the lending/savings, and other operations of the institution.

No one ratio tells it all. There are no values for any specific ratio that is necessarily
correct. It is the trend in these ratios which is critically important.

Ratios must be analyzed together, and ratios tell you more when consistently
tracked over a period of time.