Reference
Microfinance glossary
Short definitions of the terms used in microfinance products, reporting and regulation.
- Agent banking
- Financial services delivered through third-party retail outlets, such as shops and pharmacies, that handle cash deposits and withdrawals for a bank or mobile money provider.
- ASCA (accumulating savings and credit association)
- An informal group whose members pool savings into a fund and lend from it to members, usually with interest. The fund is shared out at the end of a cycle.
- Average loan balance per borrower
- Gross loan portfolio divided by the number of active borrowers. Analysts often divide it by GNI per capita as a rough proxy for depth of outreach: smaller loans suggest poorer clients.
- Client protection
- Practices that protect borrowers from harm: appropriate product design, prevention of over-indebtedness, transparent pricing, fair treatment, privacy and complaint resolution.
- Compulsory savings
- Savings a borrower must deposit as a condition of a loan. They act partly as collateral and raise the effective cost of borrowing.
- Cost per borrower
- Operating expense divided by the average number of active borrowers. It measures efficiency in absolute terms.
- Credit bureau
- An institution that collects and shares borrowers' repayment histories so lenders can assess risk and avoid multiple lending.
- Depth of outreach
- How poor an institution's clients are, as opposed to breadth of outreach, which is how many clients it serves.
- Dynamic incentives
- Promising access to larger or cheaper future loans in return for timely repayment. Also called progressive lending.
- Effective interest rate (EIR)
- The true cost of a loan expressed as an annual rate. It includes fees, compulsory savings and the effect of repaying principal in instalments.
- Financial self-sufficiency (FSS)
- Like OSS, but after adjustments for subsidies, inflation and below-market funding costs. It shows whether an institution could survive on commercial terms.
- Flat interest rate
- Interest calculated on the original loan amount for the whole term, even as the balance is repaid. A flat rate is roughly half the equivalent declining-balance rate, which can mislead borrowers.
- Gross loan portfolio (GLP)
- The total outstanding principal of all loans, including current, delinquent and restructured loans, but not loans written off.
- Group lending (joint liability)
- Lending to individuals who form a group and are jointly responsible for each other's repayments. Peer screening and peer pressure replace physical collateral.
- Individual lending
- Loans to a single borrower assessed on cash flow, character and sometimes collateral. Common for larger and more established microenterprises.
- Loan officer productivity
- Active borrowers per loan officer. It is a key driver of operating cost.
- Microfinance institution (MFI)
- Any organisation that provides financial services to low-income clients. It may be an NGO, a cooperative, a non-bank financial company or a bank.
- Microinsurance
- Insurance designed for low-income people, with low premiums, simple terms and accessible claims processes.
- Mission drift
- When an institution moves away from poorer clients towards larger, more profitable loans as it commercialises.
- Mobile money
- Electronic money stored and transferred through a mobile phone account, usually supported by an agent network for cash-in and cash-out.
- Operating expense ratio
- Operating expense divided by average gross loan portfolio. Lower means more efficient, but small-loan lenders naturally have higher ratios.
- Operational self-sufficiency (OSS)
- Operating revenue divided by the sum of financial expense, loan-loss provision expense and operating expense. Above 100% means the institution covers its costs from its own revenue.
- Over-indebtedness
- When borrowers cannot meet their repayments without serious sacrifices to living standards. It is often caused by taking several loans from different lenders.
- PAR30 (portfolio at risk > 30 days)
- The outstanding balance of all loans with a payment more than 30 days late, divided by gross loan portfolio. It is the standard measure of portfolio quality in microfinance.
- Portfolio yield
- Interest and fee income from loans divided by average gross loan portfolio. It approximates the average price clients pay.
- ROSCA (rotating savings and credit association)
- An informal group in which each member contributes a fixed amount each period and one member takes the whole pot in turn.
- Self-help group (SHG)
- A small group, mainly in India, that saves together and lends internally. Many SHGs are linked to banks for larger loans.
- How effectively an institution turns its social mission into practice and outcomes for clients.
- Solidarity group
- A small group of borrowers, usually three to ten, who guarantee each other's loans. The model was common in Latin America.
- Transformation
- The conversion of a microfinance NGO into a regulated, often deposit-taking, financial institution.
- Village banking
- A model in which a community-based group of about 20 to 50 members manages loans from an external lender and accumulates its own savings fund.
- Write-off ratio
- Loans written off during a period divided by average gross loan portfolio.