1 PEARLS for Decision Making Presentation to ______________ Credit Unions Autumn 2005

2 PEARLS  P rotectionP  E ffective financial structureE  A sset qualityA  R ates of return & costR  L iquidityL  S igns of growthS

3 Objectives of PEARLS 1.Executive Management Tool 2.Standardised Evaluation Ratios & Formulas 3.Objective, Comparative Rankings 4.Facilitate Supervisory/Regulatory Control

4 Components of PEARLS P rotectionP E ffective financial structureE A sset qualityA R ates of return & costR L iquidityL S igns of growthS

5 P = PROTECTION P1.Adequacy of Provisions for doubtful debts P2.Loans Written off /Total loans P3.Solvency Indicator

6 E = Effective Financial Structure ASSETS  95% productive assets composed of  LOANS (70%-80%)  INVESTMENTS (10% - 20%)  5% unproductive assets composed of primarily fixed assets (buildings, equipment)

7 E = Effective Financial Structure LIABILITIES & CAPITAL  80%-90% Member’s Savings/Deposits  15% Total Reserve Capital  0% Borrowings

8 Effective Financial Structure BALANCE SHEET ASSETS LIABILITIES & CAPITAL 80% - 85% Members Shares & Deposits 15%-20% Capital Reserves 80% Loans to members 15% Liquid Investments 5% Buildings & Equipment

9 Reserves Purpose of Capital provided by reserves:  Finance non-earning assets.  Improve Earnings  Absorb losses

10 A = ASSET QUALITY  Delinquency Ratio maximum 5% of total loans  Percentage of Non-earning Assets maximum 5% of total assets

11 R=Rates of Return and Costs RETURN/Yield  Loan Portfolio  Investments  Measures level of operating expenditure

12 R=Rates of Return and Costs OPERATIONAL COSTS  Administrative Costs  Provision for Bad Debts Costs

13 L = LIQUIDITY  Total Liquidity Reserves  Liquid Reserves to Withdrawable savings

14 S = Signs of Growth  Total Assets  Loans  Savings  Capital / Reserves  Investments  Borrowings  Membership

15 P.E.A.R.L.S. THE PEARLS MONITORING SYSTEM GOALS

16 Protection Monitoring Goals AREAPEARLDESCRIPTIONGOAL Protection P1 Bad debt provisions & reserve/Provision required for Loans as per Res % Protection P2 Loans written off/Total Average Loans minimise Protection P3 Solvency Indicator KEY RATIO 1 109%

17 Effectiveness Monitoring Goals AREAPEARLDESCRIPTIONGOAL Effective Financial Structure E1 Gross Loans/Total Assets 70% + Effectiveness E2 Total Investments/Total Assets < 30% Effectiveness E3 Member’s Resources/Total Assets 80%-90%

18 Effectiveness Monitoring Goals AREAPEARLDESCRIPTIONGOAL Effectiveness E4 External Credit/Total Assets 0% Effectiveness E5 Total Reserves/Total Assets KEY RATIO 2 15% Effectiveness E6 Statutory Reserve/Prior Year Savings 10%

19 Asset Quality Monitoring Goals AREAPEARLDESCRIPTIONGOAL Asset Quality A1 Total Delinquency/Gross Loan Outstanding KEY RATIO 3 <5% Asset Quality A2 Non-Earning Assets/Total Assets <5%

20 Rates of Return & Costs Goals AREAPEARLDESCRIPTIONGOAL Rates of Return & Cost R1 Total Loan Income/Average Gross Loan Balances Cover expenses & build reserves Rates of Return & Cost R2 Total Invest Inc /Average Total Investment Highest Rates (without risk) Rates of Return & Cost R3 Total Income/Average Total Assets KEY RATIO 4 Cover exps & build reserves

21 Rates of Return & Costs Goals AREAPEARLDESCRIPTIONGOAL Ratesof Return & Cost R4 Operating Expenses/ATA <5% Ratesof Return & Cost R5 Expenses/Income <43% Ratesof Return & Cost R6 Wages/Income <15%

22 Liquidity Monitoring Goals AREAPEARLDESCRIPTIONGOAL Liquidity L1 Liquidity Reserves/Uncommitted Savings KEY RATIO 5 20% Liquidity L2 % of members borrowing maximise Liquidity L3 Total Cash & Inv/Uncommitted Min 10%

23 Growth Monitoring Goals AREAPEARLDESCRIPTIONGOAL Signs of Growth S1 Growth in loans to members Signs of Growth S2 Growth in total investments Signs of Growth S3 Growth in member’s resources Signs of Growth S4 Growth in Total Reserves

24 Growth Monitoring Goals AREAPEARLDESCRIPTIONGOAL Signs of Growth S5 Growth in Statutory Reserve Signs of Growth S6 Growth in Membership Signs of Growth S7 Growth in Total Assets