1. FINANCIAL ANALYSIS OF MICROFINANCE INSTITUTIONS
Nara Hari Dhakal
Visiting Faculty

2. Context Financial statement
Provide summary information of past financial performance and current position,
Financial information can be analyzed and interpreted in a meaningful manner such that the significance of the numbers, and their implications for the microfinance institutions are understood clearly by the decision makers,
Financial Analysis
A process that converts large amount of raw data into a form helpful for decision making.

3. Type of Financial Analysis
Trend analysis: the comparison of same indicator between two points in time.
Common size analysis: the reduction of group of data to a selected base.
Ratio analysis: Establishing the mathematical relationship between two different indicators.
Break-even Analysis: determine the breakeven point for a borrower activity
The important element of financial analysis is to compare the figures that are calculated by using the above technique.
A standard is a measure of comparision.

4. Deriving Standard in Microfinance Operation
Past performance of the MFI
Comparison with another successful MFI
Target set by the MFI for itself
Guidelines set by the regulator, national and international federations
Legal requirements set by the Government

5. Trend Analysis
A measure of the change in an indicator between two points in time.
Most common form of financial analysis,
Usually stated as a percentage change since the prevision year,
Mathematical calculations is as under:
(𝐴𝑚𝑜𝑢𝑛𝑡 𝑡ℎ𝑖𝑠 𝑦𝑒𝑎𝑟 −𝐴𝑚𝑜𝑢𝑛𝑡 𝑙𝑎𝑠𝑡 𝑦𝑒𝑎𝑟) 𝐴𝑚𝑜𝑢𝑛𝑡 𝑙𝑎𝑠𝑡 𝑦𝑒𝑎𝑟 =% of Change
Change of different indicators can be computed for a number of years to get clear trends.
Help management to take corrective actions in improving the growth.
In MFI, it is useful to watch the growth of savings, loans, net income expenses, and equity. The trends in these areas can then be compared with the trends in other MFIs.
Help identify the problems by studying relationship between two indicator.
For example: why was the rate of growth in interest income lower than the growth of loans disbursed?

6. Common Size Analysis General
Common size analysis can be applied to both balance sheet and income statement.
In both cases, a base figure is identified, and all the figures in the statement are then quoted as percentage of that figure.
For the balance sheet, the base amount is the figure for total assets.
For income statement, the base is usually the total income.
Common Size Analysis of balance sheet
Help in assessing the general liquidity situation of the MFI and asset- liability mix

7. Common size analysis of Income Statement
Following is the balance sheet of XYZ MFI for two years. All the items on both assets and liabilities side have calculated as percentage of the total assets.
Liabilities and Capital
2015
2016
Amount %
Share capital
110,500.0
8.9
402,400.0
12.6
Deposits
813,142.0
65.3
2,551,318.0
80.1
Reserves
20,711.0
1.7
91,030.0
2.9
Borrowings
297,500.0
23.9
127,500.0
4.0
Payables
4,000.0
0.3
11,392.0
0.4
Total
1,245,853.0
100.0
3,183,640.0
Assets
Cash
43,858.0
3.5
321,981.0
10.1
Receivables
22,952.0
1.8
160,697.0
5.0
Outstanding loan balance
1,134,501.0
91.1
2,581,229.0
81.1
Investment
1,200.0
0.1
3,000.0
Stock
2,750.0
0.2
26,704.0
0.8
Fixed assets
40,592.0
3.3
90,929.0
3,184,540.0

8. Proposed Asset Mix S.N. Category Range 1 Cash 5-10% 2 Investments
15-20% 3
Loans
60-75% 4
Fixed assets

9. Common size analysis of Income Statement
Use the total income figures as a basis of calculation. All other items of the statement is expressed as a percentage of total income, thereby become much more easily compared and assessed. Following is the income statement of the XYZ MFI for two years. All the items are calculated as a percentage of the total income.
Income
2015
2016
Amount %
Financial Income
133,945.0
89.1
397,473.0
86.4
Fees income
4,635.0
3.1
9,545.0
2.1
Grant
10,198.0
6.8
18,423.0
4.0
Other income
1,477.0
1.0
34,749.0
7.6
Total
150,255.0
100.0
460,190.0
Expenses
Financial cost
70,450.0
46.8
167,881.0
36.5
Administrative cost
66,134.0
43.9
211,037.0
45.9
Governance cost
6,505.0
4.3
10,465.0
2.3
Surplus/deficit
7,566.0
5.0
70,807.0
15.4
150,655.0

10. Proposed Allocation of Expenses
Common size of income statement provides management with useful information about the respective income generating and cost incurring elements of the MFI operation.
Many federations set guidelines for their affiliates, based upon the experiences of their most successful MFIs.
Such guidelines may indicate that a particular allocation of expenses tends to be most efficient for successful growth.
S.N.
Category
Range 1
Financial cost
40-50% 2
Administrative cost
50-55% 3
Governance cost
5-10%
If these figures are monitored by the management of the MFI, then significant variations from the proposed guideline can be quickly identified, explanations sought, and remedial actions taken as necessary

11. Ratio Analysis
Used to compare different items through using ratios to determine the soundness of the MFI’s operations.
A ratio, unless compared with a set of standard is not meaningful, and a standard is a measure of comparisons.
There are unlimited number of possible ratios, and it is important to identify and use those ratios which are relevant to the MFI.
Comparison of ratio with a standard will help the management to interpret and assess the financial status of the society.
This would enable the management to improve the performance by taking remedial actions.
Ratios help identifying the strengths and reaffirms the efficiency of the MFI, and enhances the credibility of the MFIs.

12. Commonly used Ratios Liquidity ratio Earning ratio Solvency ratio
Capital adequacy ratio
Asset quality ratio
Growth ratio

13. Ratio Analysis Contd.. S.N. Ratio Indicators 1 Liquidity
Loan to savings ratio
Current assets to current liabilities 2
Earning
Loan yield ratio
Return on financial investment
Return on assets
Spread analysis (cost of funds, gross spread, net operating cost, operating spread, net operating spread, 3
Solvency
Leverage ratio
External debt to deposit ratio
External debt to share ratio
Debt equity ratio

14. Ratio Analysis Contd.. S.N. Ratio Indicators 4 Capital adequacy
Capital ratio
Reserve to loan ratio 5
Asset quality
Delinquency ration (Portfolio at risk)
Delinquent loans to reserve ratio
Write-off ratio
Investment ratio (ratio of OS and investment to shares, deposits, and borrowings) 6
Growth
Annual savings and loan clients,
Annual savings growth
Growth in loan portfolio
Growth in institutional capital

15. PERFORMANCE INDICATORS
Portfolio quality
Productivity and efficiency
Financial viability
Profitability
Leverage and capital adequacy
Scale, outreach, and growth

16. BALANCE SHEET S.N. Particulars Unit 2013 2014 2015 A Assets
Cash Balance
Bank balance
Outstanding loan balance
Net fixed assets
Other B
Liabilities
Savings/Deposits
External borrowing
Other liabilities C
Equity
Share capital
Reserve
Retained earning D
Liabilities and Equity

17. INCOME STATEMENT S.N. Particulars Units 2013 2014 2015 1
Operating income
Rs. ‘000
Interest income
Service charge
Other income 2
Operating expenses
Interest expenses
Administrative expenses
Loan loss provision 3
Operating net income 4
Non-operating income 5
Non-operating expenses 6
Net income

18. OUTREACH REPORT S.N. Particulars Unit 2013 2014 2015 1 Deposit balance
Depositors No 3
……. Women
No. 4
Deposit accounts 5
Outstanding loan balance 6
Active loan clients 7
……… Women 8
Loan account 9
Shareholders 10
…….. Women 11
Total staff 12
Loan officers

19. Portfolio Report Particulars Loans (No)
Outstanding loan balance (Rs. ‘000)
Overdue loan (Rs. ‘000)
Portfolio at risk (Rs. ‘000)
Loan loss reserve (%)
Loan Loss Reserve (Rs. ‘000) A B C D E
F = D*E
1-30 days past due
31-60 days past due
61-90 days past due
days past due
> 120 days past due
Total

20. PERFORMANCE INDICATORS
S.N.
Performance Dimensions
Performance Indicators 1
Portfolio quality
Repayment rate, portfolio quality ratios (arrear rate, portfolio at risk, delinquent borrowers), loan loss ratios (loan loss reserve ratio, loan loss ratio) 2
Productivity
Number of savings clients per loan officer, number of loan clients per loan officer, average loan size, deposit outstanding to loan officer, loan outstanding to loan officer 3
Efficiency
Operating cost ratio, cost per unit of currency lent, cost per loan made, salaries as a percentage of average outstanding portfolio

21. PERFORMANCE INDICATORS
S.N.
Performance Dimensions
Performance Indicators 4
Financial viability
Return on performing asset, financial spread, gross financial margin, Operational self-sufficiency, operational self-sufficiency, Subsidy dependence index 5
Profitability ratio
Return on assets, return on equity, return in business ratio, 6
Leverage and capital adequacy
Debt to equity ratio, capital adequacy ratio 7
Scale and depth of outreach indicators
Client and staff, loan outreach, savings outreach,

22. OUTREACH INDICATORS

23. PROFITABILITY INDICATORS

24. EFFICIENCY INDICATORS

25. LIQUIDITY INDICATORS

26. PRODUCTIVITY INDICATORS

27. PORTFOLIO QUALITY INDICATORS

28. SELF SUFFICIENCY INDICATORS

29. Break-Even Analysis
Process of determining the rates at which assets generate income and expenses,
Fundamental device to determine whether the assets (loans) of the MFI’s earning sufficient income to meet expenses,
Goal is to exceed the BEP so that additional income is generated to pay dividends to members and create reserves.
BEP of products and services is reached when total revenue equals total costs.
BEP help MFI in pricing its products appropriately and also increasing the volume of the portfolio so as to increase the earnings.
It is important for the MFI to calculate the BEP of the services and maintain the volume of operation above the BEP to earn profit.
BEP analysis requires information on: fixed cost, variable cost, and contribution margin.

30. Break-Even Analysis (Contd..)
Fixed cost:
Costs that are incurred on ongoing basis
Not dependent on the volume of the services and have to be met regularly
May increase when there is sufficient increase in the volume of operations
For example, if the MFI scale-up its lending operations considerably, it may require to appoint another staff members
Normally fixed cost remain the same irrespective of the level of operations.
Examples: salaries, rent, utilities, depreciation, administrative cost, etc.

31. Break-Even Analysis (Contd..)
Variable cost:
Those costs that are directly related to the volume of production or services,
They vary according to the number of units produced or volume of services offered,
For example: if a cooperative borrow Rs. 100,000 for on lending to its members, the cost of funds will be Rs. 8,000/- at an interest rate of 8%. If cooperative borrows worth Rs. 1,000,000 when the cost of funds will be Rs. 80,000/-
Examples: cost of funds, loan loss provisions, commissions, etc..

32. Break-Even Analysis (Contd..)
Contribution Margin:
A business or service organizations should cover all the fixed and variable costs, and also make a profit out of the revenues generated.
If costs are not covered, the institutions will incur a loss.
Contribution margin is calculated to determine how much revenue is required per item or loan (price or rate of interest charged) to cover all costs
Contribution margin = (Revenue – variable cost) per items/unit
Break-Even Size
Used to determine the size of the portfolio required to break-even and recover all the costs by fixing an appropriate interest rates on loans.

33. Steps on Break-Even Analysis
Calculate
Portfolio yield rate: revenue earned (interest + fees) on the portfolio outstanding amount of delinquent loans
Variable cost:
(𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡𝑠 −𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡) 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑜𝑟𝑡𝑜𝑓𝑙𝑖𝑜 𝑜𝑜𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
Contribution margin = Portfolio yield rate – Variable cost rate
Contribution = Contribution Margin x Portfolio Outstanding
Break-Even Point:
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛

34. Examples of Break-Even Analysis
S.N.
Particulars
Unit
Amount A
Fixed cost
Rs. '000
26,390
Salaries
15,000
Rent
4,000
Utilities
3,890
Administrative costs
2,500
Other costs
1,000 B
Variable cost
Loan Fund
24,000
500,000
Cost of fund
1,920
40,000
Transportation
480
10000
Loan Loss Provision
720
15000 C
Outsatnding loan
Revenue
5,760
120,000
Average loan size 50 E
Contribution Margin
2,640
55,000 F
Contribution G
Required BEP No 10 H
Volume of Rs. 50,000 outstanding loans required to breakeven