MFI Sustainability Analysis

Concept, Indicators, Process and Issues

Dewan A.H. Alamgir

8 December 2012
BRAC Development Institute

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 Sustainability

Sustainability
Sustainability refers to financial and
institutional ability of an
organization to provide services for
satisfying current and future
demands of clients or customers.

Sustainability of an Microfinance
Institution
Institutional capacity of an MFI to
meet the current and future
demands for financial services
profitably.

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Sustainability of
Microfinance institution

Two aspects of Sustainability

Institutional sustainability
Financial viability

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Institutional
sustainability

Institutional sustainability: Critical Factors

Demand driven service, for example, savings and

credit
Proper legal structure
Good governance and accountability
Explicit and appropriate policies are in place with
regards to:
Area selection
Selection of customers
Credit and savings
Monitoring and evaluation
MIS
Risk management
Expansion
Human resource development
Others: HR rules, financial policy, internal control,
procurement etc.
Strong Leadership
Competent Human Resources
Required level of resources
Strong Social support

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Financial
Viability

Financial viability:

(1) Condition 1: Income of

microfinance program should
be more than total operating
and financial expenses
including provisions for bad
debt, that is,
Income > (Operating expenses +
Financial expenses)

(2) Condition 2: Condition No. 1

should be maintained on
sustainable basis.

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Income side of financial
viability

Objective: Higher sustained

income

Factors: Lending interest rate

Loan outstanding
Client base
Average loan size
Efficient fund
management

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Expenditure side of
financial viability
Objective: Sustained lower cost

Operating cost
Human resource and
overhead cost

Financial cost
interest rate on savings
interest on borrowing
capital structure

Bad debt loan recovery rate

loan loss provision

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Indicators
Profitability indicators
total annual income
return on equity (ROE)
return on asset (ROA)
OSS
FSS
Nominal annual rate and inflation
and subsidy adjusted rates

Efficiency indicators
portfolio per loan officer
clients per loan officer
Portfolio risk indicators
Loan recovery rate (on time
and cumulative)
PAR
provision

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Examples
Bangladeshi MFIs are normally
profitable
MFIs of small medium and large are
profitable
Main factors: high lending rate, large
client base (densely populated
country), low operating expenses,
good portfolio
Examples:
MFI-A MFI-B MFI-C

OSS: 400 200 190-210

FSS; 210 130 140-150
ROA; 13 4.75 6-6.2

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Process of achieving
sustainability

Planned expansion
Proportionate client base
Control operating cost
Adequate resources
Balanced capital structure
Excellent portfolio quality

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Concerns
Interest rate: GOB imposed
ceiling reduces income and
encourages MFIs to go for better
off clients to maintain higher
income
Cost of capital: High commercial
bank borrowing may risk viability
Unplanned expansion may force
expensive borrowing from banks
Preset legal structure prohibits
mobilization of resources from
public

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