![ADJUSTMENTS – EXAMPLE A1: Subsidized Cost of Funds Adjustment Formula: All adjustments methodologies analyzed use a similar formula even if the accounts and the rate used are different: A1 = (Period Average[Accounts] x [Rate] – Interest (and Fee) Expense on [Accounts]](https://image.slidesharecdn.com/measuringperformanceofmicrofinanceinstitutions-aframeworkforreportinganalysisandmonitoring-110927065817-phpapp01/85/Measuring-performance-of-microfinance-institutions-a-framework-for-reporting-analysis-and-monitoring-30-320.jpg)
![ADJUSTMENTS – EXAMPLE A1: Subsidized Cost of Funds Adjustment Standard for Benchmarking: A1 = [(Average Short-term Borrowings + Average Long-term Borrowings) x Market Rate for Borrowing] – Interest and Fee Expense on Borrowings A1 = [(B15 avg + B19 avg ) x N10] – I10](https://image.slidesharecdn.com/measuringperformanceofmicrofinanceinstitutions-aframeworkforreportinganalysisandmonitoring-110927065817-phpapp01/85/Measuring-performance-of-microfinance-institutions-a-framework-for-reporting-analysis-and-monitoring-33-320.jpg)
![ADJUSTMENTS – EXAMPLE A1: Subsidized Cost of Funds Adjustment Sample Subsidized Cost of Funds Adjustment for Benchmarking: Adjustment for Subsidized Cost of Fund Formula Adjustment Average Short-Term Borrowings Plus Average Long-term Borrowings B15 avg + B19 avg 18,716,138 Market Rate, End of Period N10 1 9.5% Market Cost of Funds (B15 avg + B19 avg) x N10 1 1,778,033 Interest and Fee Expense I10 1,039,719 Adjustment for Subsidized Cost of Fund ** [(B15 avg + B19 avg ) x N10 1 ] – I10 738,314](https://image.slidesharecdn.com/measuringperformanceofmicrofinanceinstitutions-aframeworkforreportinganalysisandmonitoring-110927065817-phpapp01/85/Measuring-performance-of-microfinance-institutions-a-framework-for-reporting-analysis-and-monitoring-35-320.jpg)
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
- 2. OVERVIEW Presentation follows the structure of the Framework document: Chapter 1: Introduction Chapter 2: Financial Statements and Reports Chapter 3: Analytical Adjustments Chapter 4: Financial Ratios and Indicators Chapter 5: Creating and Analyzing Performance Monitoring Reports Promotion of the Framework
- 4. INTRODUCTION Developing Standard Definitions of Financial Terms, Ratios, and Adjustments for Microfinance Purpose To provide microfinance practitioners with a means to develop financial statements and reports so that those statements and reports can be used for meaningful analysis and monitoring and are in accordance with International Financial Reporting Standards (IFRS) History 1995: “Financial Ratio Analysis of Microfinance Institutions” 2002: “Microfinance Financial Definitions Guidelines: Definitions of Selected Financial terms, Ratios and Adjustments for Microfinance” 2004: Development of “Measuring Performance of Microfinance Institutions: A Framework for Reporting, Analysis, and Monitoring” (the “Framework”).
- 5. INTRODUCTION Future Framework document is only the first step. Next steps for SEEP are: To develop Training materials and training courses To encourage acceptance and use of Framework by donors, investors, rating firms, and others To establish Microfinance Standards Committee To incorporate standards for deposit-taking MFIs and set of social performance indicators as consensus builds on such standards and indicators Editions Use For performance monitoring only; not a chart of accounts or a set of accounting policies Mainly for internal management purposes, board reporting or external reporting Should completed one step at a time following each chapter in order.
- 6. CHAPTER 2: FINANCIAL STATEMENTS AND REPORTS
- 7. FINANCIAL STATEMENTS AND REPORTS Income Statement ( profit and loss statement) Balance Sheet ( statement of financial position ) Cash Flow ( sources and uses of funds statement ) Direct Method Indirect Method Portfolio Report Non-Financial Data Report Each statement/ report contains: Brief explanation of its purpose Suggested format Definition of each account name
- 8. INCOME STATEMENT Flow statement - activity over a given period Summarizes revenue and expense transactions Divided between revenue accounts and expense accounts Includes division of operating accounts and non-operating accounts
- 9. INCOME STATEMENT Income Statement Detail – Example Ref. Account Name Definition Calculation I2 Financial Revenue from Loan Portfolio Revenue from interest, fees, commissions, and other fees earned on the loan portfolio. This includes not only interest paid in cash but also interest accrued but not yet paid. I3 + I4 I3 Interest on Loan Portfolio Interest earned on the loan portfolio. If the MFI is earning interest on loans to employees or board members, this interest should be disclosed. If this interest is significant, the MFI should create two subaccounts for (I3)—one for interest from clients and the other for interest from related parties. I4 Fees and Commissions on Loan Portfolio Penalties, commissions, and other fees earned on the loan portfolio. This may also include revenue under Islamic finance methods. If the MFI is earning fees and commissions on loans to employees or board members, these should be disclosed. If these fees and commissions are significant, the MFI should create two subaccounts for (I3)—one for fees and commissions from clients and the other for fees and commissions from related parties.
- 10. BALANCE SHEET Stock statement – captures financial position of an MFI at a moment in time Summary of: Assets – what the MFI has or is owed Liabilities – what the MFI owes Equity – what the MFI owns Assets = Liabilities + Equity
- 11. BALANCE SHEET Short-term and Long-term Accounts Short-term: can be turned into cash within a year from the date of the report Gross Loan Portfolio contained in a single account Investments classified as Trade Investments and Other Investments Contra Asset Accounts Accounts with negative numbers Represent a reduction of an asset For example: Impairment Loss Allowance
- 12. BALANCE SHEET Balance Sheet Detail - Example Ref. Account Name Definition Calculation Assets B3 Net Loan Portfolio The (B4) Gross Loan Portfolio less the (B5) Impairment Loss Allowance. B4 – B5 B4 Gross Loan Portfolio All outstanding principals due within or at 12 months for all outstanding client loans. This includes current, delinquent, and renegotiated loans, but not loans that have been written off. All delinquent loans should be considered short-term and included here. It does not include interest receivable. If the MFI makes loans to employees, board members, or others associated with the institution, it should disclose this and, if the amount is significant, create subaccounts to (B4) to separate loans to clients and loans to related parties. B5 Impairment Loss Allowance Previously known as the loan loss allowance, the portion of the (B4) Gross Loan Portfolio that has been expensed (provisioned for) in anticipation of losses due to default. This item represents the cumulative value of the impairment losses on loans less the cumulative value of loans written off. Express this item as a contra asset account and state it as a negative number. a
- 13. CASH FLOW STATEMENT Summarizes each transaction or event that causes cash to increase (sources of cash) or decrease (uses of cash) Classifies inflows and outflows of cash into 3 main categories: Operating Activities Investing Activities Financing Activities
- 14. CASH FLOW STATEMENT Direct Method Reconstructs income statement by tracing the movement of cash and adding events not on the income statement that cause and inflow or outflow of cash
- 15. CASH FLOW STATEMENT Direct Method Detail - Example Ref. Account Name Definition Calculation Cash Flows from Operating Activities C1 Cash Received from Interest, Fees, and Commissions on Loan Portfolio The total value of all financial revenue received in cash from the (B4) Gross Loan Portfolio. If an MFI uses cash accounting, this account is the same as (I2) Financial Revenue from Loan Portfolio. It does not include fees described in (I6) Other Operating Revenue. C2 Cash Received from Interest on Investments Total value of all financial revenue received in cash from (B2) Trade Investments and (B8) Other Investments. If an MFI uses cash accounting, this account is the same as (I5) Financial Revenue from Investments. C3 Cash Received as Other Operating Revenue Total value of all other operating revenue received in cash for the provision of financial services. If an MFI uses cash accounting, this account is the same as (I6) Other Operating Revenue. C4 Value of Loans Repaid The value of all loan principals repaid in cash by the MFI’s clients during the period. This includes payments related to current and past-due loans as well as recoveries of written-off loans.
- 16. CASH FLOW STATEMENT Indirect Method Deductive Begins with Net Income (After Taxes and Before Donations) Adds back all other sources of cash and subtracts all other uses of cash that can be deduced by changes in Balance Sheet accounts Adds non-cash expenses that appear on the Income Statement, such as Impairment Losses on Loans.
- 17. CASH FLOW STATEMENT Indirect Method Detail - Example Ref. Account Name Definition Calculation Cash Flows from Operating Activities C27 Net Income (Before Taxes and Donations) Same as (I25) Net Income (Before Taxes and Donations). C28 Depreciation and Amortization Same as (I19) Depreciation and Amortization Expense for the period. This non-cash expense represents the theoretical decrease in value of a Fixed Asset. C29 Impairment Losses on Loans Same as (I13) Impairment Losses on Loans. C30 Cash Paid for Taxes Same as (C8) Cash Paid for Taxes C31 Value of Loans Repaid Same as (C4) Value of Loans Repaid. C32 (Value of Loans Disbursed) Same as (C9) Value of Loans Disbursed. C33 (Increase)/Decrease in Trade Investments Same as (C10) Net (Purchase)/Sale of Trade Investments. C34 Increase/(Decrease) in Deposits Same as (C11) Deposits/ (Withdrawals) from clients.
- 18. PORTFOLIO AND ACTIVITY REPORT Links the loan portfolio information of the three previous statements Represents in detail an MFI’s microlending activity Presents the quality of the loan portfolio Provides detail on how the MFI has provisioned against potential losses
- 19. PORTFOLIO AND ACTIVITY REPORT Must include at least: Portfolio Activity Information Movement in the Impairment Loss Allowance A Portfolio Aging Schedule Portfolio at Risk vs. Arrears MFIs should have: Policy for calculating and creating an Impairment Loss Allowance and writing off loans
- 20. PORTFOLIO AND ACTIVITY REPORT Portfolio Report Detail - Example Ref. Account Name Definition Calculation P1 Number of Loans Disbursed The number of all loans disbursed during the period. For MFIs using a group lending methodology, the number of loans should refer to the number of individuals receiving loans as part of a group or as part of a group loan. If one person receives more than one loan in the period, count each loan. P2 Value of Loans Disbursed Same as (C9) Value of Loans Disbursed. P3 Number of Loans Outstanding The number of loans in the (B4) Gross Loan Portfolio. For MFIs using a group lending methodology, the number of loans should refer to the number of individuals receiving loans as part of a group or as part of a group loan. P11 + P13 + P15 P4 Value of Loans Outstanding Same as the (B4) Gross Loan Portfolio. P12 + P14 + P16 P5 Impairment Loss Allowance Same as (B5) Impairment Loss Allowance.
- 21. NON-FINANCIAL DATA REPORT Additional operational and macroeconomic data needed to calculate key financial ratios Non-Financial Data Report Detail – Example Ref. Account Name Definition Operational Data N1 Number of Active Clients The number of active borrowers, depositors, and other clients who are currently accessing any of the MFI's financial services; i.e., they have a loan, deposit, and/or insurance account that is active as of the report date. Individuals who access multiple services with an MFI should be counted as a single client. Individuals who are not currently receiving services are not included. Neither borrowers whose loans have been written off nor depositors who have not had a deposit, withdrawal, or interest earned in the past 12 months are considered to be active. N2 Number of New Clients during period The number of clients who did not have an active account at the beginning of the period but do have an active account at the end of the period. N3 Number of Active Borrowers The number of individuals who currently have an outstanding loan balance with the MFI or are primarily responsible for repaying any portion of the (B4) Gross Loan Portfolio. Individuals who have multiple loans with an MFI should be counted as a single borrower.
- 22. ADDITIONAL INFORMATION Mapping accounts Adding accounts Segregating Financial and Non-Financial Services How Financial Statements are Linked
- 23. CHAPTER 3: ANALYTICAL ADJUSTMENTS
- 24. ANALYTICAL ADJUSTMENTS This chapter: Examines differences and similarities in common adjustment methodologies used in microfinance Analyzes effect of adjustments on bottom line Recommends standard adjustment calculations Even if user does not calculate adjustments, he/she can still calculate many of the ratios in the next chapter
- 25. ADJUSTMENTS: KEY POINTS Availability of data is a key issue If calculation produces a negative number, the adjustment is NOT applied Managers should explain the adjustment calculation and which variables they chose Adjustments can be applied for any period of time The method used to calculate averages makes a difference.
- 26. PURPOSE OF ADJUSTMENTS True performance Adjustments Help reverse accounting policies or circumstances that can present a distorted picture of the MFI’s performance Help simulate an MFI’s performance under conditions similar to those of a commercially funded operation Benchmarking Adjustments Enable managers to compare or benchmark an MFI’s performance with other MFIs Create common minimum standards for recognizing and managing credit, country, and operational risk in financial reporting
- 27. TYPES OF ADJUSTMENTS 3 types of Adjustments: Subsidies Cost of Funds In-Kind Inflation Portfolio at risk For each category of adjustment: Description of the adjustment Differences in calculation methodologies Recommendations for adjustments for true performance Recommendations for a standard adjustment for benchmarking A description of the effects of the adjustments on the financial statements.
- 28. ADJUSTMENTS – EXAMPLE A1: Subsidized Cost of Funds Adjustment Description: “ The subsidized cost of funds adjustment was developed to put a market value on any special borrowing arrangements that an MFI may have. Such arrangements, frequently referred to as concessional borrowings , are common through special government or donor programs or low-interest loans from the MFI’s network organization. The adjustment is made to determine the likely cost of these borrowings if an MFI had to pay a market rate for them”.
- 29. ADJUSTMENTS – EXAMPLE A1: Subsidized Cost of Funds Adjustment Differences Adjustment Criteria Examples Accounts Used Total borrowings Borrowings below market rate Total funding liabilities (includes deposits) Total funding liabilities less voluntary deposits Interest and fee expense on funding liabilities Interest and fee expense on borrowings Interest expense on funding liabilities Interest expense on borrowing Market Rate Local certificate of deposit (CD) rate/savings rate Three-month CD rate from the International Monetary Fund (IMF) Statistics (line 60l) Discount rate from the IMF Statistics (line 60) Weighted average of the MFI’s current commercial borrowings Rates proposed by banks to MFIs that are approximately the same size
- 30. ADJUSTMENTS – EXAMPLE A1: Subsidized Cost of Funds Adjustment Formula: All adjustments methodologies analyzed use a similar formula even if the accounts and the rate used are different: A1 = (Period Average[Accounts] x [Rate] – Interest (and Fee) Expense on [Accounts]
- 31. ADJUSTMENTS – EXAMPLE A1: Subsidized Cost of Funds Adjustment Analyzing True Performance MFI must determine which accounts and rate are most appropriate For each funding liability that carries a below-market rate: Calculate difference between the market rate for that type of deposit or borrowing and actual interest and fee expense and add it to the Adjustment Market rate options: If MFI has significant commercial funding: weighted average rate of those funds Weighted average rate on competitors’ commercial borrowings
- 32. ADJUSTMENTS – EXAMPLE A1: Subsidized Cost of Funds Adjustment True Performance Example: Subsidized Cost of Funds Adjustment for True Performance MICRO MFI is primarily funding its loan portfolio with its own equity and a $100,000 six-year loan from an international development agency. The loan was received two years ago and carries an interest rate of 5 percent per annum in local currency. The management team has recently begun negotiations with a local bank to obtain additional funding and was quoted a rate of 13 percent per annum on those commercial funds. To analyze true performance of its MFI for the year, the manager opts to use the 13-percent rate as the alternate market rate of funds, as illustrated below: Average Accounts: $100,000 (no movement occurred in the account during the year) Period: 1 year Rate: 13 % Interest and Fee Expense: $5,000 for the 1-year period A1 = ($100,000 x 13%) – $5,000 = $13,000 – $5,000 = $8,000
- 33. ADJUSTMENTS – EXAMPLE A1: Subsidized Cost of Funds Adjustment Standard for Benchmarking: A1 = [(Average Short-term Borrowings + Average Long-term Borrowings) x Market Rate for Borrowing] – Interest and Fee Expense on Borrowings A1 = [(B15 avg + B19 avg ) x N10] – I10
- 34. ADJUSTMENTS – EXAMPLE A1: Subsidized Cost of Funds Adjustment For Benchmarking, the Microbanking Bulletin recommends the following criteria: Accounts: (B15) Short-term Borrowings (B19) Long-term Borrowings (I10) Interest and Fee Expense on Borrowings Period: Average Rate: Discount Rate published in the IMF Statistics, line 60. N10 in the Non-Financial Data Report.
- 35. ADJUSTMENTS – EXAMPLE A1: Subsidized Cost of Funds Adjustment Sample Subsidized Cost of Funds Adjustment for Benchmarking: Adjustment for Subsidized Cost of Fund Formula Adjustment Average Short-Term Borrowings Plus Average Long-term Borrowings B15 avg + B19 avg 18,716,138 Market Rate, End of Period N10 1 9.5% Market Cost of Funds (B15 avg + B19 avg) x N10 1 1,778,033 Interest and Fee Expense I10 1,039,719 Adjustment for Subsidized Cost of Fund ** [(B15 avg + B19 avg ) x N10 1 ] – I10 738,314
- 36. EFFECT OF ADJUSTMENTS Increase expenses on the income statement Increase or decrease assets on the balance sheet Example: Adjustment for Subsidized Cost of Funds Increase Interest and Fee Expense on Funding Liabilities (I18) Decrease Retained Earnings, Current Year (B28) Increase Adjustments to Equity (B31), in order for balance sheet to remain “in balance”
- 37. ADJUSTED FINANCIAL STATEMENTS Once the MFI has calculated all its adjustments, it should create an adjusted income statement and balance sheet to analyze impact of adjustments Using adjusted financial statements, the MFI can calculate adjusted financial ratios presented in Chapter 4.
- 38. CHAPTER 4: FINANCIAL RATIOS AND INDICATORS
- 39. SEEP 18 RECOMMENDED RATIOS Profitability and Sustainability Operational Self-Sufficiency (OSS) Financial Self-Sufficiency (FSS) 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
- 40. SEEP 18 RECOMMENDED RATIOS Portfolio Quality PAR Adjusted PAR Write-off Ratio Adjusted Write-off Ratio Risk Coverage Ratio Adjusted Risk Coverage Ratio Efficiency and Productivity 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
- 41. FINANCIAL RATIOS AND INDICATORS For each ratio, the Framework includes a description of the following” The formula Why the ratio is important, and How to use the adjusted data in the calculations and the effects of using adjustments.
- 42. RATIOS AND INDICATORS – EXAMPLE R2: Return on Assets/Adjusted Return on Assets Why this Ratio is Important Return on Assets (ROA) indicates how well an MFI is managing its assets to optimize its profitability. The ratio includes not only the return on the portfolio, but also all other revenue generated from investments and other operating activities. If an institution’s ROA is fairly constant, this ratio can be used to forecast earnings in future periods… Formula
- 43. RATIOS AND INDICATORS – EXAMPLE R2: Return on Assets/Adjusted Return on Assets Effects of Adjustments All five adjustments affect this ratio and, as with AROE, the primary effect is to reduce Net Operating Income. Most MFIs cannot expect to fund their future growth with continuing infusions of new subsidies. Adjusted Return on Assets (AROA) provides an indication of their ability to expand profitably with unsubsidized funding…
- 44. CHAPTER 5: CREATING AND ANALYZING PERFORMANCE MONITORING REPORTS
- 45. THREE TYPES OF ANALYSIS Trend analysis Formula for determining relative change between periods: P trend = P 1 – P 0 P 0 For Ratios, absolute change analysis is customary: R trend = R 1 – R 0 Variance analysis Formula: P var = P actual P plan For Ratios, R var = R actual – R plan Benchmarking
- 46. Sample Performance Monitoring Reports Management Monthly & Quarterly/Semi-annual Board of Directors (quarterly) Investors/Donors (semi-annual) Reports are samples only. Design and content issues should take into account: Timeliness of data Accuracy and integrity of data Relevance of data Requirements by audience
- 47. PROMOTION OF THE FRAMEWORK Translation Training Modules FRAME tool Consensus Building and Networking on Standards
- 48. QUESTIONS ?
Editor's Notes
- #3: Presenter’s Notes Time: 0.5 minutes - Give brief overview of the topics you will cover during this presentation
- #5: 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.
- #6: 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.
- #8: 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.
- #9: 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)
- #10: 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.
- #11: 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
- #12: 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.
- #13: 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.
- #14: 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
- #15: 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
- #16: 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.
- #17: Presenter’s notes Time: 1 minute Slide is self-explanatory
- #18: 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.
- #19: Presenter’s notes Time: 0.5 minutes - Slide is self-explanatory
- #20: 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.
- #21: 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
- #22: 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
- #23: 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.
- #25: Presenter’s notes Time: 1 minute This slide is self-explanatory.
- #26: 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.
- #27: 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.
- #28: 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.
- #29: 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
- #30: 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.
- #31: 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.
- #32: Presenter’s notes Time: 2 minutes Go through the example for true performance analysis using A1: Subsidized cost of funds. Slide is self-explanatory.
- #33: 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
- #34: 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)
- #35: 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
- #36: 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.
- #37: 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)
- #38: Presenter’s notes Time: 1 minutes - Slide is self-explanatory
- #40: 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.
- #41: 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.
- #42: Presenter’s notes Time: 1 minute - Self-explanatory
- #43: 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
- #44: Presenter’s notes Time: 2 minutes Each ratio has a section showing the effect of adjustments This is the example for ROA
- #46: 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.
- #47: 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.
- #48: 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.
- #49: Presenter’s notes IF TIME ALLOWS, TAKE QUESTIONS FROM THE AUDIENCE.