Microfinance Standards Ratios Essay

2925 Words Jul 23rd, 2012 12 Pages

A maturing microfinance industry needs standardized methods to measure and analyze financial performance and risk management. The proposed Microfinance Financial Reporting Standards: Measuring Financial Performance of Microfinance Institutions (the Standards) seeks to address this need. These Standards are designed for use by all microfinance institutions (MFIs): non-governmental organizations, non-bank financial institutions or companies, commercial banks, rural banks, credit unions, and cooperatives. Below are the detailed description of each ratio and table.

1. Profitability Ratios

All MFIs, from non-profit NGOs, to for-profit banks, must be profitable over the long-term in order to be
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As the microfinance industry evolved, MFIs began using more commercial approaches to measure financial viability or profitability. This included more traditional financial measures such as Return on Assets (ROA) and Return on Equity (ROE).
ROA and ROE remain valuable measures of an MFI’s profitability. They are financial metrics that are well established and well understood across the commercial spectrum. As such, they are useful regardless of the legal status or mission of an MFI.
The Microfinance Financial Reporting Standards recommends the use of ROA and ROE as measures of MFI profitability rather than OSS and FSS.

Capital Adequacy and solvency Ratios

The Capital Adequacy ratio (CAR) measures an MFI’s strength and stability by looking at the relationship between its capital base and asset base. Solvency refers to the availability of cash over the longer-term to meet financial commitments as they come due. The concepts of capital adequacy and solvency have both become more crucial as

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