CGAP Training Accounting Principles for MFIs Slides 4b

©CGAP/World Bank, 2009

SAFE Profitability Indicators A7-O14a

Ref. DESCRIPTION 2005 2006 2007

R1 Operational Self-Sufficiency Ratio

a Financial Revenue 60,114 200,455 739,948

b Financial Expense 2,087 645 53,558

c Impairment Losses on Loans - - 31,208

d Operating Expense 365,181 671,391 947,923

e b + c + d 367,268 672,036 1,032,689

R1 Operational Self-Sufficiency Ratio = a/e 16.37% 29.83% 71.65%

Adj R1 Financial Self-Sufficiency Ratio

a Financial Revenue 60,114 200,455 739,948

b Adjusted Financial Expense 5,397 73,426 146,789

c Adjusted Impairment Losses on Loans - - -

d Adjusted Operating Expense 405,181 711,391 987,923

e b + c + d 410,578 784,817 1,134,712

Adj R1 Financial Self-Sufficiency Ratio = a/e 14.64% 25.54% 65.21%

R2 Return on Assets (ROA)

a Net Operating Income (307,154) (471,581) (292,741)

b Taxes - - -

c a - b (307,154) (471,581) (292,741)

d Average Assets 305,818 860,288 1,522,798

R2 Return on Assets (ROA) = c/d -100.44% -54.82% -19.22%


SAFE Profitability Indicators (continued)

A7-O14b


Adj R2 Adjusted Return on Assets (AROA)

a Adjusted Net Operating Income (350,464) (584,362) (425,972)

b Taxes - - -

c a - b (350,464) (584,362) (425,972)

d Adjusted Average Assets 305,818 869,964 1,542,734

Adj R2 Adjusted Return on Assets (AROA) = c/d -114.60% -67.17% -27.61%

R3 Return on Equity (ROE) = c/d

a Net Operating Income (307,154) (471,581) (292,741)

b Taxes - - -

c a - b (307,154) (471,581) (292,741)

d Average Equity 219,582 524,835 767,651

R3 Return on Equity (ROE) = c/d -139.88% -89.85% -38.13%

Adj R3 Adjusted Return on Equity (AROE) = c/d

a Adjusted Net Operating Income (350,464) (584,362) (425,972)

b Taxes - - -

c a - b (350,464) (584,362) (425,972)

d Adjusted Average Equity 219,582 534,510 787,588

Adj R3 Adjusted Return on Equity (AROE) = c/d -159.61% -109.33% -54.09%


SAFE ALM Ratios A7-O15a


R4 Yield on Gross Portfolio Ratio = a/b

aCash Received from Interest, Fees,and

Commissions on Loan Portfolio47,072 189,619 734,069

b Average Gross Loan Portfolio 100,735 409,367 1,088,835

R4 Yield on Gross Portfolio Ratio = a/b 46.73% 46.32% 67.42%

R5 Portfolio to Assets Ratio

a Gross Loan Portfolio 201,470 617,263 1,560,406

b Assets 611,635 1,108,941 1,936,655

R5 Portfolio to Assets Ratio = a/b 32.94% 55.66% 80.57%

R6 Cost of Fund Ratio

a Financial Expenses on Funding Liabilities 2,087 645 6,032

b Average Deposits

c Average Borrowings 20,756 52,802 38,053

d b + c 20,756 52,802 38,053

R6 Cost of Fund Ratio = a/d 10.05% 1.22% 15.85%

Adj R6 Adjusted Cost of Fund Ratio

a Adjusted Financial Expenses on Funding Liabilities 5,397 13,728 57,420

b Average Deposits

c Average Borrowings 20,756 52,802 38,053

d b + c 20,756 52,802 38,053

Adj R6 Adjusted Cost of Fund Ratio = a/d 26.00% 26.00% 150.90%


SAFE ALM Ratios (continued) A7-O15b


R7 Debt to Equity Ratio

a Liabilities 172,472 498,435 1,011,859

b Equity 439,163 610,506 924,796

R7 Debt to Equity Ratio = a/b 39.27% 81.64% 109.41%

Adj R7 Adjusted Debt to Equity Ratio

a Liabilities 172,472 498,435 1,011,859

b Adjusted Equity 439,163 629,857 895,318

Adj R7 Adjusted Debt to Equity Ratio = a/b 39.27% 79.13% 113.02%

R8 Liquid Ratio

a Cash 267,439 302,067 215,686

b Trade Investments 17,000 47,319 38,270

c a + b 284,439 349,386 253,956

d Demand Deposits 130,960 434,344 950,517

e Short-term Deposits - - -

f Short-term Borrowings 41,512 64,091 12,014

g Interest Payable on Funding Liabilities - - 49,328

h Account Payable and Other Short-term Liabilities - - -

i d + e + f + g + h 172,472 498,435 1,011,859

R8 Liquid Ratio = c/i 164.92% 70.10% 25.10%


Purpose of Internal Controls

Preserve the safety of assets

Improve quality of customer service

Ensure reliability of financial

information

Ensure staff adherence to policy and

guidelines

A7-O16


Sources of Risk

Delinquency Risk

Fraud

Liquidity Risk

Operating Risk

Security Risks

Accounting/Bookkeeping Risk

Risk of Computerization

Governance

A7-O17


External Audits

A formal, independent review of an entity’s financial statements, records, transactions, and operations, performed by professionals, for purposes of:

Lending credibility to financial statements and other management reports

Assuring accountability for donor funds

Identifying weaknesses in internal controls and systems

Scopes differ significantly according to the objectives of each audit.

A7-O18


Balancing Act:

A Microfinance Accounting Game

A8-O1


Instructions to Determine Levels of Risk and Interest on Debt

Risk Level

Choose a level of risk: Low, Medium, High

Roll the die. Given the number that appears on the top of the die, the player calculates his/her risk:

Low risk = 1 x die # = 1x6 = 6

Medium risk = 2 x die #

High risk = 3 x die #

Record the risk level in the space on the opening balance sheet.

I rolled a 6 and chose medium risk—my risk level is 2 x6 = 12.

A8-O2a


Instructions to Determine Levels of Risk and Interest on Debt (continued)

Determine Interest on Debt

Using the same number that appeared on the die from the previous roll, players calculate the interest rates to be paid on borrowings. For

Concessional loans = 0.5 x die #

Commercial Loans = 2 x die #

Record interest rates for debt on opening Balance Sheet in the box provided.

A8-O2b

Using my same roll of 6—

my concessional loan rate = 0.5 x 6 = 3%

my commercial loan rate = 2 x 6 = 12%


Sample Entries for Loan Disbursements and Loan Repayments

LOAN DISBURSEMENTS (D cards)

1. If $15,000 in loans was disbursed on the fifth week of the year, the

General Journal entry is as follows:

A8-O3a

Wk# Account Title Ref. Debit Credit

5 Loans Outstanding – Current 120 15,000

5 Cash 101 15,000


Sample Entries for Loan Disbursements and Loan Repayments (continued)

A8-O3b

2. The calculation of loan fees earned is as follows:

LOAN FEES EARNED = Amount of Loan Disbursed x Loan Fee Rate

Loan Fees Earned = ($15,000 x 5%)

Loan Fees Earned = $750

The General Journal entry becomes:



5 Cash 101 15,000

5 Cash 101 750

5 Loan Fees 415 750



A8-O3c

3. The calculation of interest earned is as follows:

INTEREST REVENUE = Amount of Loan Disbursed x Interest Rate x [Number of Weeks the Loan will be Outstanding in the Current Year]

NOTE: In this example, the loan was disbursed on week 5. Therefore it will be outstanding for 47 weeks this year.

Interest Revenue = ($15,000 x 26% x 47/52)

Interest Revenue = $3,525

DEFERRED REVENUE = Amount of Loan Disbursed x Interest Rate x

[Number of Weeks the Loan will be Outstanding in the Next Year]

NOTE: In this example, the loan was disbursed on week 5 of this year. Therefore it will be outstanding for 47 weeks this year and will remain outstanding for five weeks next year.

Deferred Revenue = ($15,000 x 26% x 5/52)

Deferred Revenue = $ 375



A8-O3d

The complete General Journal entry becomes:



5 Cash 101 15,000

5 Cash 101 750

5 Loan Fees 415 750

5 Cash 101 3,900

5 Interest Revenue (47/52 weeks) 410 3,525

5 Deferred Revenue (5/52 weeks) 225 375



A8-O3e

LOAN REPAYMENTS (R cards)


2 Cash 101 15,000

2 Loans Outstanding - Current 120 15,000

2 Deferred Revenue (2/52 weeks) 225 150

2 Interest Revenue (2/52 weeks) 410 150


Opportunity Square – A Choice

This is your decision—you may choose or decline the

opportunity.

Decide based on your risk level, cash position, and so

on.

A8-O4

Other Squares

Typical transactions of an MFI, to be recorded as

stated on the square.


Accessing a Line of Credit

Cash balance at any time should be a positive one.

If a player does not have enough cash to make loan

disbursements or pay expenses, she must access her line

of credit.

A8-O5


26 Cash 101 15,000

26 Short-term Borrowings 215 15,000


Instructions on How to Start Playing

1. Roll die to see who starts first. The person who rolls the

highest number on the die begins.

2. The next players are determined in a clockwise direction

(the person to your left).

3. The first player rolls die, moves the marker the number

squares as appears on the die.

4. Record the transaction of the square you landed on in

your General Journal and cash ledger.

A8-O6

Education

CGAP Training Accounting Principles for MFIs Slides 4b