Financial Sector Assessment:A Handbook Box 7.1 Benchmarks for Outreach and Financial Performance and Soundness of Rural Finance and Microfinance Institutions and product (GNP)per capita and (b)national poverty income level an of equty to deb ratio of ge total loans outstanding to d ne (marke liabili ndness () rks can be vices as a percentage of administrative and fron loans,invest .Breadth and depth of ou L number of de it accounts(because tative and operating expe nt rat n 30 day number of active borrowers,and asa as a perc competitive advantage over and tend to crowd out the private sector-based providers of similar financial services to households,microenterprises,and small businesses.In a number of countries,state-owned development finance institutions or specialized banks are the institutional vehicles used.The key issues to address in the assessment.aside from whether the institutional vehicles are reaching their target sector or client base and have,in fact,contributed to the development and expansion of the target sector,are (a)efficiency of loan collection,(b)incidence of loan defaults and adequacy of loan-loss ver operating lo 7.3.2 Non-bank,Non-profit NGO MFls ose NGOs that have credit ecalecdc redit-only MFls.Tho 192
192 Financial Sector Assessment: A Handbook 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 competitive advantage over and tend to crowd out the private sector-based providers of similar financial services to households, microenterprises, and small businesses. In a number of countries, state-owned development finance institutions or specialized banks are the institutional vehicles used. The key issues to address in the assessment, aside from whether the institutional vehicles are reaching their target sector or client base and have, in fact, contributed to the development and expansion of the target sector, are (a) efficiency of loan collection, (b) incidence of loan defaults and adequacy of loan-loss provisions, (c) claims on budgetary or fiscal resources for loan guarantees and additional capital to cover operating losses, and (d) level of solvency or insolvency. 7.3.2 Non-bank, Non-profit NGO MFIs Non-bank, non-profit NGO MFIs include (a) mixed-purpose NGOs that have credit provisions in their socially oriented activities and (b) specialized credit-only MFIs. Those MFIs are generally private sector-owned institutions and are typically organized as nonBox 7.1 Benchmarks for Outreach and Financial Performance and Soundness of Rural Finance and Microfinance Institutions Standards and indicators for the breadth and depth of outreach, the operating and financial performance, and the financial soundness of rural finance and microfinance institutions have been developed by an international network of donors and practitioners. Those standards and indicators have been adopted by prudential supervisory agencies and regulatory authorities in a number of countries. Among the more prominent examples are the standards and indicators developed and detailed in the monitoring systems developed by ACCION International (ACCION “CAMEL”), World Council of Credit Unions (WOCCU “PEARLS”) and Microfinance Information eXchange (MIX). For purposes of comparison with and reference to best practices, the benchmarking standards published periodically by WOCCU, MIX (MicroBanking Bulletin), MicroRate, and Microfinance Centre for Central and Eastern Europe (CEE) and the Newly Independent States (NIS) are easily accessible. Those benchmarks can be useful in carrying out the assessment of adequacy of access for rural finance and microfinance institutions, and are summarized here. • Breadth and depth of outreach − number of deposit accounts (because some institutions such as postal savings banks [PSBs] provide only deposit services) − number of active borrowers, and as a percentage of total population and of population at or below poverty line − average loan balance or amount per borrower, and as a percentage of (a) gross national product (GNP) per capita and (b) national poverty income level • Financial structure − ratio of institutional capital to average total assets − ratio of equity to debt − ratio of average total loans outstanding to average total assets − commercial funding (market-price liabilities) as a percentage of gross loan portfolio • Overall financial performance and soundness − adjusted Return on Assets (ROA) − adjusted Return on Equity (ROE) − operational self-sufficiency (revenue from loans, investments, and other financial services as a percentage of administrative and operating expenses) − financial self-sufficiency (revenue from loans, investments, and other financial services as a percentage of financial or interest expenses, loan-loss provisions, and administrative and operating expenses) − on-time loan repayment rate − portfolio at risk overdue greater than 30 days as a percentage of gross loan portfolio − loan–loss reserve as a percentage of portfolio at risk overdue greater than 30 days
Chapter 7:Rural and Microfinance Instittions:Regulatory and Supervisory Issues 心n nies Act.Some MFIs are stand others may be affiliated with or sponsored by intema tional NGOs such as FINCA,CARE,Catholic Relief Services,World Vision,ACCION International,and Women's World Banking.The geographical reach of their operations vary depending on their organizational and legal status and on the type of NGO sponsor with some MFIs operating only at the district or county level others on a province-wide or region-wide basis,and a few on a nationwide scale. 7.3.3 Membership-Based CFls associations (e.g.,producers,services,marketing and rura savings and credit functions;and (b)singl membership-based,financial cooperative organi ns (e.g credit unions and savings and credit cooperative organizations [SACCOs]).CFls,which have been in existence in many countries much longer than non-bank,nonprofit NGO MFls,are clearly distin. guishable from the NGO MFIs in that their financial transactions (deposit taking and credit giving)are generally limited to registered members under a closed-or open-com- mon bond typically defined by geography (residence),occupation,or place of employ ts and pri vileg in CFls a and m ment is exercised b owners.In gene I CFIs wil umber MFin many countreand their sombned outrechill tend to b member larger as well 7.3.4 Postal Savings Banks A PSB has the ability to reach a very large number of depositors for savings and time deposits in generally small amounts,and to provide payments and transfer or remittance services,particularly in the rural areas in a number of countries,including Azerbaijan Kenya,Pakistan,and Tanzania.However,PSBs are limited to deposit-taking and payment es and do nd credit PSBs e intended primari ovide a safe and se mall savings of poo r and I eholds,especially in rural area even though the management and boards of PSBs may be tempted to expand into rura finance and microfinance lending services to improve earnings.In practice,the priority should be on improving efficiency,cost-effectiveness,and governance before broadening the asset portfolio beyond safe assets such as bank deposits and government issues. 7.3.5 Development Finance Institutions In many countries,Development Finance Institutions (DFIs)have been established and pital ine cted prim the gaps in the of fin a services t at are not normally provided by the banking institutions.The DFIs also play a crucial role in the development of SMEs,the housing sector,and in some countries micro
193 Chapter 7: Rural and Microfinance Institutions: Regulatory and Supervisory Issues 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 profit foundations, trusts, or associations. In a number of cases, the MFIs are organized as formally incorporated entities under a country’s Companies Act. Some MFIs are stand-alone local entities, while others may be affiliated with or sponsored by international NGOs such as FINCA, CARE, Catholic Relief Services, World Vision, ACCION International, and Women’s World Banking. The geographical reach of their operations vary depending on their organizational and legal status and on the type of NGO sponsor, with some MFIs operating only at the district or county level others on a province-wide or region-wide basis, and a few on a nationwide scale. 7.3.3 Membership-Based CFIs CFIs are (a) multipurpose cooperative associations (e.g., producers, services, marketing, and rural cooperatives) that include savings and credit functions; and (b) single-purpose, membership-based, financial cooperative organizations (e.g., credit unions and savings and credit cooperative organizations [SACCOs]). CFIs, which have been in existence in many countries much longer than non-bank, nonprofit NGO MFIs, are clearly distinguishable from the NGO MFIs in that their financial transactions (deposit taking and credit giving) are generally limited to registered members under a closed- or open-common bond, typically defined by geography (residence), occupation, or place of employment. The rights and privileges of ownership in CFIs are based on the one person–one vote principle, and management is exercised by members–owners. In general, CFIs will outnumber NGO MFIs in many countries, and their combined outreach will tend to be larger as well. 7.3.4 Postal Savings Banks A PSB has the ability to reach a very large number of depositors for savings and time deposits in generally small amounts, and to provide payments and transfer or remittance services, particularly in the rural areas in a number of countries, including Azerbaijan, Kenya, Pakistan, and Tanzania. However, PSBs are limited to deposit-taking and payment services and do not extend credit. PSBs are intended primarily to provide a safe and secure facility for the small savings of poor and low-income households, especially in rural areas, even though the management and boards of PSBs may be tempted to expand into rural finance and microfinance lending services to improve earnings. In practice, the priority should be on improving efficiency, cost-effectiveness, and governance before broadening the asset portfolio beyond safe assets such as bank deposits and government issues. 7.3.5 Development Finance Institutions In many countries, Development Finance Institutions (DFIs) have been established and funded by the Government to develop and promote certain strategic sectors of the economy (e.g., highly capital intensive investments, the agricultural sector) and to achieve social goals. DFIs are expected primarily to fill in the gaps in the supply of financial services that are not normally provided by the banking institutions. The DFIs also play a crucial role in the development of SMEs, the housing sector, and in some countries micro-