Ratio Analysis of Community-Managed Microfinance Programs

Publication Date: 2008
Published by: Small Enterprise Education and Promotion (SEEP) Network
Document Type: Toolkit

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This paper emphasizes the need to develop a special set of ratios for community-managed microfinance programs.

This paper argues that conventional ratios that measure MFI performance are not as effective for community-managed microfinance (CMMF). CMMF needs a separate set of ratios to measure its performance.

The paper makes the following points:

• CMMF has succeeded in reaching the very poor, especially in the remote rural areas of India and Africa;
• CMMF groups (CMMFGs) operate differently from other MFIs, with:
  
  • Capital derived solely from member savings;
  • Lack of complex book-keeping methods;
  • Low operating costs;
  • Low requirement of managerial skills.
• Traditional methods of measuring performance cannot be applied to CMMFGs for the following reasons:
  
  • CMMFGs are inherently sustainable and therefore, standard sustainability ratios are meaningless;
  • Current ratios determine progress and define access using technical measures. But CMMFGs are made up of investors who share profits and losses. Meaningful ratios therefore, need to report on client-level benefits;
  • Program efficiency needs to be considered at both the CMMFG level and the implementing organization level.
• Evaluation of CMMF program needs to consider member satisfaction, financial performance, operating efficiency of the CMMFG and the implementing organization.

The paper states that the purpose of ratios is to improve program performance. Ratios should observe the trend within a program and determine whether they are positive or negative. The paper concludes with a list of the factors that will substantially affect useful financial ratios.