Microfinance consensus guidelines: Guiding principles on regulation and supervision of microfinance

Abstract

The evolution of the microfinance industry has led to a greater focus on the financial viability of microfinance institutions (MFIs). A variety of measurements have been used to measure MFI performance, many of which have been recognized as standard indicators. On closer examination, it is evident that these standard indicators are being calculated and applied in different ways. This has led to confusion among practitioners and analysts, as well as to considerable distortions when comparing MFIs. The industry recognizes this deficiency and agrees that developing standard definitions of financial terms and common indicators is an important next step in its development. The definitions established in this document will make comparisons between MFIs more meaningful and promote more transparency in MFI reporting. Transparency is increasingly important in the industry as mature MFIs look to commercial funding sources and investors to support their growth. It is anticipated that this paper will contribute to a standard understanding of several financial terms and ratios within the international microfinance industry. The terms and ratios presented here include mainly those that the authors believed were not only commonly used, but were also the subject of some confusion. This document is intended for an audience that has some basic familiarity with accounting terms, financial statements, and microfinance institutions. The primary objective of this document is to put forward standard definitions for selected financial terms and to suggest a standard method of calculating certain financial ratios. The document is divided into three sections: (i) a list of financial terms and definitions, (ii) a description of financial ratios, and (iii) a brief discussion and description of financial adjustments. 2 Microfinance Consensus Guidelines The contributors to this effort recognize that it is not possible for all microcredit providers to use the same accounting standards and chart of accounts, which are frequently dictated by local practices and internal needs. To be clear, this document should not be used as a substitute for a chart of accounts or accounting policies. It is also not intended to be a financial analysis guide, as analysts will normally use other financial indicators and information beyond that which is contained in this document. There are many reference materials for MFIs and analysts, several of which are listed at the end of this document. MFIs may re…