6. KEY PERFORMANCE INDICATORS
This section defines all of the ratios in the Key Performance Indicator Report. The purpose of this section is to provide the formulas and purposes of ratios, and to highlight some of the key issues related to each ratio, including some specific calculation issues.
Profitability indicators
Profitability indicators are calculated both for the period and for the year-to-date. With the exception of Operational Self-Sufficiency (OSS) and Financial Self-Sufficiency (FSS), profitability indicators generally include an item from the Income Statement as the numerator and an item from the Balance Sheet as the denominator. Amounts on the Income Statement refer to income or expense (or the difference) during the period (whether the period is one quarter or year-to-date). Amounts on the Balance Sheet are generally averages of outstanding amounts over the period.
To calculate the average amount for the quarter or year, accurate sub-period averages are computed by the PMT, as explained in the section on ratio calculation of this book. For the purposes of this glossary, we will only show the formulae for the amount for the quarter and not the year-to-date. However, the PMT calculates both (and does so, on an annualized basis).
P1 Operating Self-Sufficiency (%):
Measure show well an MFI can cover all its direct coststhrough internally generated income.
Total operating income (Y05)
____________________________
Total expenses (Y19)
Total expenses (Y19) = Total financing expenses (Y10) + Provision for loan losses (Y12) + Total operating expenses (Y18).
P2 Financial Self-Sufficiency (%):
Measures how well an MFI covers its costs taking into account adjustments to expenses. The
purpose of these adjustments is to determine how well the MFI could cover its costs if received no subsidies and funded its expansion with commercial-cost liabilities.
Total operating income (Y05)
__________________________________________________________________________________
Total expenses (Y19) + Adjustment for inflation + Adjustment for subsidized funding
Total expenses (Y19) = Total financing expenses (Y10) + Provision for loan losses Y12 + Total operating expenses (Y18).
Adjustment for inflation = Inflation rate * (Average total equity B39 – Average net fixed assets B12)
Adjustment for subsidized funding = ((Average short-term subsidized debt B21 + Average long-term subsidized debt B27) * Market interest rate MIR) – ((Average short term subsidized debt B21 + Average long term subsidized debt B27) * Subsidized Borrowed Funds Rate SBFR)
Note: an adjusted operating expense may also include adjustments for additional Provision for loan losses, reversal of accrued interest income, in-kind donations, etc. if the MFI or analyst deems necessary. These adjustments are not included in the PMT as we assume appropriate provisioning has already taken place and that in-kind donation adjustments (if any) are recorded on the Income Statement as reported by the MFI.
P3 Yield on investments (%):
The ratio of the money gained to the money spent on investments. This effectively measures how effective the institution’s investments are.
Income from investments (Y03)
________________________________________________________________________
Average short-term investments(B03) + Average long-term investments(B09)
P4 Portfolio yield (%):
Measures how much theMFI received in interest and fees during theperiod relative to its average outstandingportfolio. Yield is the initial indicator of a loanportfolio’s ability to generate revenue withwhich to cover financial and operatingexpenses. Portfolio yield should be close to
the Effective interest rate charged by the MFI. It is almost always lower however because of
late payments. This ratio is annualized.
Interest income from loans(Y01) + Feeincome from loans(Y02)
___________________________________________________________
Average Gross loan portfolio(B04)
Note: If the MFI has calculated their Effective interest rate, it is sometimes interesting to calculate the difference between the Portfolio yield and the Effective interest rate. This is
referred to as the Yield gap ratio.
P5 Return on assets (%):
Measured how well the institution uses its average total assets to generate returns. This ratio is annualized.
Net income after taxes(Y25)
___________________________
Average total assets(B15)
P6 Return on equity (%):
Calculates the rate of return on the average equity for the period. Because the numerator does not include non operating items such as donations, the ratio is frequently used as proxy for the commercial viability. Usually, RoE calculations are net of taxes. Institutions that do not use average
equity as the denominator should indicate if it is based on equity at the beginning of the
period or the end. This ratio is annualized.
Net income after taxes (Y25)
_____________________________
Average total equity(B39)
P7 Total operating income / Equity (%):
Measures how well the institution uses its equity to generate income. This ratio is annualized.
Total Operating Income(Y05)
___________________________
Average total equity (B39)
Balance Sheet Indicators (SACCOs only)
BSI1 Total equity / members (Shillings):
Measures the capitalisation of the institution in terms of equity; how much equity is available per member.
Total equity(B39)
_____________________
Number of members(A30)
BSI2 Total savings / members (Shillings):
Measures the average amount each member has saved.
Compulsory savings(B16b) + Voluntarysavings(B17b)
_________________________________________________
Number of members(A30)
BSI3 Total savings / equity (%):
An indicator of the relation of savings to equity.
Compulsory savings(B16b) + Voluntarysavings(B17b)
________________________________________________
Total equity (B39)
BSI4 Total savings / total liabilities (%):
Measures the share that savings have in the institution’s liabilities.
Compulsory savings (B16b) + Voluntarysavings (B17b)
___________________________________________________
Total liabilities(B31)
BSI5 Total loans / total savings (%):
Ratio of loans compared to total savings.
Value of outstanding loans (A08)
________________________________________________
Compulsory savings(B16b) + Voluntarysavings(B17b)
Liquidity and Funding
L1 Liquidity ratio (%):
The Liquidity ratio is one measure of the institution’s ability to meet near-term demands for cash. The ratio is heavily influenced by the particular circumstances of each MFI thus it is difficult to
construct benchmarks. A low Liquidity ratio may not always indicate a problem, since many institutions maintain credit lines with commercial banks. It is important to take the amount and conditions of such credit lines into account when evaluating the liquidity risk of an institution.
Cash and near cash(B01) + Deposits in banks(B02)+ Short term investments(B03)
_____________________________________________________________________________
Total assets(B15)
L2 Deposits as a percentage of assets (%):
Indicates what percentage of the total institutional assets are held as short and long term deposits.
Total Short-term deposit(B19) + Time Deposits >1 year(B25)
_________________________________________________________
Total assets(B15)
L3 Cash / Current liabilities (%):
Indicates the institution’s liquidity risk in terms of its ability
to meet its current liabilities out of its cash in
hand and cash in bank.
Cash (B01)
________________________________
Total current liabilities(B24)
Capital Ratios
C1 Debt to equity ratio (%):
The debt/equity ratio is the simplest and best-known measurement of capital adequacy, measuring the overall leveraging or gearing of the institution. The debt/equity ratio is of particular interest to lenders because it indicates how much of a safety cushion (in the form of equity) the institution has available to absorb losses before the lender is put at risk. NGO microfinance institutions usually have low debt to equity ratios, because of their inability to take deposit liabilities and their limited ability to borrow from commercial lenders.
When NGO MFIs become regulated intermediaries, debt/ equity ratios should rise rapidly. However, it is generally believed that MFIs should not be as highly leveraged as commercial banks, because microloan portfolios are backed by less collateral and their risk profiles are still not as well understood as those conventional bank portfolios.
Total liabilities(B31)
_____________________
Total equity(B39)
C2 Capital adequacy ratio (%):
This contains the same information as the debt/equity ratio, but expresses it in a different form. When capital adequacy standards are imposed on banks or other regulated financial institutions,
assets are usually required to be ‘risk weighted’ to reflect the fact that some assets (government bonds for instance) are much safer than others, such as unsecured loans.
Total equity(B39)
_________________
Total assets(B15)
C3 Cost of funds ratio (%):
Calculates a blended interest rate for all of the MFI’s funding liabilities. It reflects actual funding
costs and does not consider the adjustment for subsidized funding. The ratio is annualized.
Total financing costs(Y10)
________________________________
Average funding liabilities(B31)
Portfolio Quality
Q1 Portfolio as a percentage of assets (end of period) (%):
Indicates what percentage of thetotal institutional assets are held in the loan portfolio.
Gross loan portfolio(B04)
_________________________
Total assets(B15)
Q2 Portfolio at risk > 1 day / Gross loan portfolio (%):
Indicates the balance of loansoutstanding that have a payment past duemore than one day as a percentage of grossloan portfolio. Measures the quality of the loanportfolio outstanding. This can be comparedto the amount of Loan loss reserve ratio.
Portfolio at risk > 1 day(A22)
______________________________
Gross loan portfolio(B04)
Q3 Portfolio at risk > 30 days / Gross loan portfolio (%):
Indicates the balance of loansoutstanding that have a payment past duemore than thirty days as a percentage of grossloan portfolio. Measures the quality of the loanportfolio outstanding. This can be comparedto the Risk coverage ratio.
Portfolio at risk > 30 days(A24)
__________________________________
Gross loan portfolio(B04)
Q4 Number of loans in arrears > 1 day / Number of active loans (%):
Indicates thenumber of loans outstanding that have apayment past due more than one day as a percentage of total number of loans outstanding. Measures the quality of the loan portfolio outstanding. This can be compared to the Portfolio at risk > 1 day (Q2).
If Q2 is much greater than Q4, this is an indication that a relatively small number of loans with large balances are causing the delinquency problem (this could be because larger loans are the ones defaulting or because clients are defaulting at the beginning of the loan term). If Q2 is much smaller than Q4, then this indicates the opposite. This information may help to manage delinquency.
Number of loans in arrears > 1 day(A21)
_________________________________________
Number of outstanding loans(A07)
Q5 Number of loans in arrears > 30 days / Number of active loans (%):
Indicates thenumber of loans outstanding that have apayment past due more than thirty days as a percentage of total number of loans outstanding. Measures the quality of the loan portfolio outstanding. This can be compared to the Portfolio at risk > 30 days (Q3). If Q3 is much greater than Q5, this is an indication that a relatively small number of loans with large balances are causing the delinquency problem (this could be because larger loans are the ones defaulting or because clients are defaulting at the beginning of the loan term). If Q3 is much smaller than Q5, then this indicates the opposite. This information may help to manage delinquency.
Number of loans in arrears > 30 days(A23)
_________________________________________
Number of outstanding loans(A07)
Q6 Loan loss reserve ratio (%):
Reflects the accumulated Loan loss reserve (minus write offs) on the Balance Sheet relative to the Gross loan portfolio at the end of the period. It provides an indication of the quality of the loan portfolio based on the proportion of the portfolio that is reserved to allow for anticipated loan losses, providing the amount of the reserve is derived from some meaningful indicator of risk such as PAR.
Loan loss reserve(B05)
___________________________
Gross loan portfolio(B04)
Q7 Risk coverage ratio (%):
Shows how much of the portfolio at risk is covered by the MFI’s loan loss reserve. It is a rough indicator of how prepared an institution is to absorb loan losses in the worst-case scenario.
Loan loss reserve (B05)
___________________________________
Portfolio at risk > 30 days(A24)
Q8 Loan loss ratio (%):
Indicates amount of loans written off (removed from the BalanceSheet) as a percentage of average portfolioduring the period. The Loan loss ratioprovides an indication of the past quality of theloan portfolio. Its usefulness is stronglydependent on the MFI’s write-off policy. This
ratio is not annualized due to the fact that most MFIs only write off loans once a year and write-offs do not affect the Income Statement.
Amount written off during period(A26)
____________________________________
Average gross loan portfolio(B04)
Q9 Growth in value of loan portfolio (%):
Calculates the percentage growth of the portfolio over the period.
Gross loan portfolio(B04) this period – Gross loan portfolio(B04) previous period
_________________________________________________________________________________
Gross loan portfolio(B04) previous period
Operating Efficiency and Productivity of Loan Portfolio
E1 Operating expense ratio (%):
Includes all administrative and personnel expense, and is the most commonly used efficiency indicator. Care must be taken when using this ratio to compare MFIs. Smaller MFIs or those that provide smaller loans will compare unfavorably to others, even though they may be serving their target market efficiently. Likewise, MFIs that offer savings and other services will also compare unfavorably to those that do not if gross loan portfolio is used as the denominator; therefore, average total assets is more appropriate denominator for financial intermediaries when calculating the operating expense ratio. The ratio is annualized.
Total operating expenses(Y18)
_________________________________
Average gross loan portfolio(B04)
E2 Operating costs per loan outstanding (Shillings):
Measures operating costs in theperiod per loan outstanding. The ratio isannualized.
Total operating expense(Y18)
_______________________________________
Average number of loans outstanding(A07)
E3 Operating costs per Shilling of savings (%):
This ratio measures operating costincurred by the financial institution relative tothe amount of savings it is holding as liability.Low cost liabilities (i.e. savings) are often themost efficient way for a financial institution tofinance its loan portfolio. The goal of this ratiois for it to reduce period on period (indicatingthe institution is becoming more efficient inmobilizing low cost liabilities). The ratio isannualized.
Total operating expense (Y18)
_________________________________________________
Average of voluntary(B16) + compulsory(B17)savings
E4 Operating costs per loan disbursed (during period) (Shillings):
Measuresoperating costs in Shillings per loan disbursedduring the period.
Total operating expense(Y18)
_______________________________
Number of loans disbursed (A02)
E5 Percent of clients taking 1st loan (during period) (%):
This ratio measures the growthrate in new clients (measured by the numberof first time loan clients).
First time loan clients(A03)
_____________________________________
Average number of active borrowers(A09)
LP1 Average loan portfolio outstanding per loan officer (Shillings):
This ratio measuresthe value of loans outstanding per loan officer.Since an increasing loan portfolio per loanofficer will generate more earned income, anincreasing trend for this ratio is moredesirable. The ratio is useful primarily for theinternal management of productivity and mustbe used cautiously (if at all) when comparingproductivity to other MFIs, particularly if an institution is growing rapidly and/or when comparing MFIs with different lending methodologies.
Gross loan portfolio (B04)
______________________________________
Total number of loan officers (A37)
LP2 Average number of active loan clients per loan officer:
This ratio measures staffproductivity – how many active borrowerseach loan officer handles. This ratio shouldincrease to an optimal level as the loan officermatures and the institution matures.
Number of active loan clients (A06)
____________________________________
Number of loan officers(A37)
Outreach to Loan Clients
O01 Average disbursed loan amount (duringperiod) (Shillings):
Calculates the averageloan size of all loans disbursed during theperiod.
Value of loans disbursed(A01)
______________________________
Number of loans disbursed(A02)
O02 Average loan size outstanding per loan client, excluding group loans (end of period):
Calculates the average loan size ofclients that receive loans as individuals only;group loans are excluded from this ratio.
Value of outstanding loans(A08)
___________________________________________________________________________
Number of clients receiving loans as individuals, excluding group loans(A06)
O03 Average loan size outstanding per borrower (individuals and members of groups) (end of period):
Calculates theaverage loan size, counting individuals(individual borrowers and members of borrowing group).
Value of outstanding loans (A08)
_________________________________________________________________________
Total number of active borrowers(individuals and members of groups) (A09)
O04 Average loan size outstanding as % of GNI (end of period):
This ratio calculates therelation between the average loan size andthe average income per capita.
Value of outstanding loans (A08)
_________________________________________________________________________
Total number of active borrowers(individuals and members of groups) (A09)
_________________________________________________________________________
GNI per capita(GNI)
O05 Percentage of active loan clients receiving loans as individuals (end of period):
Thisratio measures the amount of the loan clientsthat borrow as individuals. This means that there is no group guarantee; rather traditional collateral is often required.
Number of active loan clients receiving loans as individuals(A06)
________________________________________________________________
Number of active loan clients(A09)
O06 Percentage of loan clients with income below poverty line (end of period):
Thisratio measures the amount of the loan clientswhose income is below a certain threshold, sothey could be regarded as “poor”. This givesan indication of the level of poverty of theclients of an MFI. This ratio provides a proxyfor poverty outreach. The default threshold isset to 150,000 UGX per month and can beadjusted individually by each MFI.
Number of borrowers with income below poverty line(A10a)
_______________________________________________________
Total number of active borrowers(A09)
O07 Percentage of outstanding loans below poverty line (end of period):
This ratiomeasures the amount of the loan clients thatare borrowing a relatively small amount. It gives an indication of the level of poverty of the clients of an MFI. This ratio provides a proxy for poverty outreach. The default threshold is set to 200,000 UGX and can be adjusted individually by each MFI.
Number of outstanding loans below poverty line (A10b)
_____________________________________________________
Number of outstanding loans (A07)
O08 Percentage of outstanding loans in the agriculture sector:
This ratio measures thepercentage of number of loans in theagricultural sector.
Number of outstanding loans in the agriculture sector(A11b)
__________________________________________________________
Number of outstanding loans(A07)
O09 Percentage of outstanding portfolio in the agriculture sector:
This ratio measures thepercentage of the value of loans in theagricultural sector.
Value of outstanding loans in the agriculture sector (A11c)
___________________________________________________________
Value of outstanding loans(A08)
O10 Percentage of outstanding loans to female clients:
This ratio measures the percentageof number of loans to female clients.
Number of outstanding loans to female clients(A12b)
___________________________________________________
Number of outstanding loans(A07)
O11 Percentage of outstanding portfolio to female clients:
This ratio measures thepercentage of the outstanding portfolio madein loans to female clients.
Value of outstanding loans to female clients(A12c)
__________________________________________________
Value of outstanding loans (A08)
O12 Percentage of outstanding loans in rural branches:
This ratio measures thepercentage of number of loans made in ruralbranches.
Number of outstanding loans in rural branches (A13b)
____________________________________________________
Number of active loan clients(A07)
O13 Percentage of outstanding portfolio in rural branches:
This ratio measures thepercentage of value of loans made in ruralbranches.
Value of outstanding loans in rural branches(A13c)
___________________________________________________
Value of outstanding loans(A08)
O14 Net change in number of members (during period):
Measures growth and outreach ofSACCOs in absolute terms.
Number of members (A30) this period – Number of members(A30) previous period
O15 Net change in number of borrowers (during period):
Measures growth, activityand outreach of SACCOs in absolute terms.
Total number of active borrowers(A09) this period – Total number of active borrowers(A09) previous period
O16 Net change in value of short-term and long-term deposits (during period):
Measures the capability of a SACCO to mobilize savings and deposits from one period to the other.
(Short-term deposits(B19) + Time deposits > 1 Year(B25) this period) – (Short-term deposits (B19) + Time deposits > 1 Year(B25) previous period)
O17 Net change in value of shares (during period):
As members buy more shares of aSACCO, this measures the increase in totalshare value of a SACCO.
Member shares(B32) this period – Member shares(B32) previous period Savings Ratios
SAV1 Average amount per savings account (end of period) (Shillings):
Provides the averagesavings account size.
Compulsory savings(A16b) +Voluntary savings(A17b)
_________________________________________________
Number of savings accounts(A14)
SAV2 Average amount per saver (end of period) (Shillings):
Provides the average amount ofsavings per person. This could be lower thanSAV1 since some savings accounts mayrepresent multiple depositors.
Compulsory savings(A16b) + Voluntary savings(A17b)
____________________________________________________________
Total number of savers(individuals and members of groups)(A15)
SAV3 Ratio of savings clients to loan clients (end of period) (%):
This ratio tells you the relationof savings clients to loan clients; 100% wouldmean that there are as many savers asborrowers and e.g. 300% would mean that thenumber of savers is three times the number of borrowers.
Total number of savers (individuals and members of groups)(A15)
__________________________________________________________________________
Total number of active borrowers (individuals and members of groups)(A09)
PEARLS Specific Ratios
Many of the World Council of Credit Unions’(WOCCU) PEARLS ratios are captured by the PMTor the PMT provides a ratio that practicallymeasures the same effect. The following ratios areunique to the PEARLS monitoring system and aretherefore set apart on the PMT itself. They arelabeled in the PMT as PR1 to PR4. Thecorresponding PEARLS ratios labels are listed inparenthesis. These ratios are relevant for SACCOsonly.
PR1 Solvency (corresponds to WOCCU PEARLS P6):
This measures whether theinstitution can repay member-client savingsafter correcting for actual and predictablelosses. WOCCU recommends a minimumvalue of 110% for this ratio.
( (Total assets (B15) + Provision for loan losses (Y12))
– (Balance of loans delinquent greater than 12 months (A31)
+ (Balance of loans delinquent from 1 to 12 months (A32) * 0.35)
+ Total liabilities (B31) + Problem assets losses that will be liquidated ( A33)
– Total short term deposits (B19)) )
___________________________________________________________________________________
(Total short term deposits(B19) + Capital from shareholders or member shares(B32))
PR2 Interest paid on average savings (corresponds to WOCCU PEARLS R5):
This measures whether the institution is paying a high enough return on savings to encourage deposits. WOCCU recommends this value to be greater than the current rate of inflation.
Interest paid on voluntary savings(Y07a) + Interest paid on compulsory savings(07b)
+ Interest paid on time deposits(Y08)
__________________________________________________________________________________
Average total short term deposits (B19)
PR3 Dividends paid on average shares (corresponds to WOCCU PEARLS R7):
This measures whether the institution is paying a high enough return on shares to encourage share purchase. WOCCU recommends this value to be greater than or equal to Interest paid on average savings.
Total dividend paid on shares(Y09)
__________________________________
Average value of member shares(B32)
PR4 Membership growth (corresponds to WOCCU PEARLS S10):
This measures thepercent growth in membership period onperiod. WOCCU recommends this value to beat least 12% annually.
Number of members(A30) this period – Number of members(A30) previous period
___________________________________________________________________________
Number of members (A30) previous period