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PEARLS for Decision Making

Presentation to

______________ Credit Unions

Autumn 2005

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PEARLS

Protection P

Effective financial structure E

Asset quality A

Rates of return & cost R

Liquidity L

Signs of growth S

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Objectives of PEARLS

1. Executive Management Tool

2. Standardised Evaluation Ratios & Formulas

3. Objective, Comparative Rankings

4. Facilitate Supervisory/Regulatory Control

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Components of PEARLS

Protection P

Effective financial structure E

Asset quality A

Rates of return & cost R

Liquidity L

Signs of growth S

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P = PROTECTION

P1. Adequacy of Provisions for doubtful debts

P2. Loans Written off /Total loans

P3. Solvency Indicator

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E = Effective Financial Structure

ASSETS95% productive assets composed of

LOANS (70%-80%)INVESTMENTS (10% - 20%)

5% unproductive assets composed of primarily fixed assets (buildings, equipment)

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E = Effective Financial Structure

LIABILITIES & CAPITAL80%-90% Member’s Savings/Deposits15% Total Reserve Capital 0% Borrowings

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Effective Financial Structure

BALANCE SHEETASSETS LIABILITIES & CAPITAL

80% - 85% Members Shares & Deposits

15%-20% Capital Reserves

80% Loans to members

15% Liquid Investments

5% Buildings & Equipment

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Reserves

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

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A = ASSET QUALITY

Delinquency Ratio

maximum 5% of total loans Percentage of Non-earning Assets

maximum 5% of total assets

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R=Rates of Return and Costs

RETURN/Yield Loan Portfolio Investments Measures level of operating expenditure

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R=Rates of Return and Costs

OPERATIONAL COSTS Administrative Costs Provision for Bad Debts Costs

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L = LIQUIDITY

Total Liquidity Reserves Liquid Reserves to Withdrawable savings

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S = Signs of Growth

Total Assets Loans Savings Capital / Reserves Investments Borrowings Membership

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P.E.A.R.L.S.

THEPEARLS

MONITORING SYSTEM GOALS

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Protection Monitoring Goals

AREA PEARL DESCRIPTION GOAL

Protection P1 Bad debt provisions & reserve/Provision required for Loans as per Res49.03

100%

Protection P2 Loans written off/Total Average Loans minimise

Protection P3 Solvency Indicator

KEY RATIO 1

109%

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Effectiveness Monitoring Goals

AREA PEARL DESCRIPTION GOAL

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%

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Effectiveness Monitoring Goals

AREA PEARL DESCRIPTION GOALEffectiveness E4 External Credit/Total Assets 0%Effectiveness E5 Total Reserves/Total Assets

KEY RATIO 215%

Effectiveness E6 Statutory Reserve/Prior Year Savings

10%

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Asset Quality Monitoring Goals

AREA PEARL DESCRIPTION GOAL

Asset

QualityA1 Total Delinquency/Gross Loan

Outstanding

KEY RATIO 3

<5%

Asset

QualityA2 Non-Earning Assets/Total

Assets<5%

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Rates of Return & Costs Goals

AREA PEARL DESCRIPTION GOALRates of Return & Cost R1 Total Loan Income/Average

Gross Loan BalancesCover expenses & build reserves

Rates of Return & Cost R2 Total Invest Inc /Average Total

InvestmentHighest Rates (without risk)

Rates of Return & Cost R3 Total Income/Average Total

Assets KEY RATIO 4Cover exps & build reserves

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Rates of Return & Costs Goals

AREA PEARL DESCRIPTION GOALRatesof Return & Cost R4 Operating Expenses/ATA <5%

Ratesof Return & Cost R5 Expenses/Income <43%

Ratesof Return & Cost R6 Wages/Income <15%

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Liquidity Monitoring Goals

AREA PEARL DESCRIPTION GOALLiquidity L1 Liquidity

Reserves/Uncommitted Savings KEY RATIO 5

20%

Liquidity L2 % of members borrowing maximise

Liquidity L3 Total Cash & Inv/Uncommitted

Min 10%

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Growth Monitoring Goals

AREA PEARL DESCRIPTION GOALSigns 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

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Growth Monitoring Goals

AREA PEARL DESCRIPTION GOALSigns of Growth S5 Growth in Statutory Reserve

Signs of Growth S6 Growth in Membership

Signs of Growth S7 Growth in Total Assets