How to measure microfinance institution performance
Investors, regulators, rating agencies and managers assess microfinance institutions (MFIs) with a set of ratios that became standard from the late 1990s. Benchmarking initiatives such as the MicroBanking Bulletin and later the MIX Market promoted these ratios and published adjusted data that could be compared across institutions.
1. Portfolio quality
| Ratio | Formula | Reading |
|---|---|---|
| PAR30 | Outstanding balance of loans > 30 days late ÷ gross loan portfolio | The headline risk measure. Below about 5% is commonly treated as healthy. |
| Write-off ratio | Loans written off ÷ average gross loan portfolio | Check it alongside PAR, because aggressive write-offs can make PAR look better. |
| Risk coverage | Loan-loss reserve ÷ PAR30 | How well provisions cover risky loans. |
Note that PAR measures the whole outstanding balance of a late loan, not just the missed instalment. That makes it stricter than a simple “repayment rate”.
2. Sustainability and profitability
- Operational self-sufficiency (OSS) = operating revenue ÷ (financial expense + loan-loss provision expense + operating expense). Above 100% means costs are covered.
- Financial self-sufficiency (FSS) applies the same test after adjustments for subsidised funding, in-kind donations and inflation.
- Return on assets (ROA) and return on equity (ROE), ideally on an adjusted basis.
3. Efficiency and productivity
- Operating expense ratio = operating expense ÷ average gross loan portfolio.
- Cost per borrower = operating expense ÷ average number of active borrowers.
- Borrowers per loan officer.
Institutions that make very small loans will look less efficient on the expense ratio, even when they are well run. Cost per borrower corrects for this.
4. Outreach
- Breadth: number of active borrowers and depositors.
- Depth: average loan balance ÷ GNI per capita (a rough proxy for client poverty), and the share of women borrowers.
5. Revenue and pricing
- Portfolio yield = interest and fee income from loans ÷ average gross loan portfolio. It approximates what clients actually pay. Compare it with the stated rates; see interest rates.
Why adjustments matter
Two MFIs with the same reported profit can be very different if one receives cheap donor loans. Adjusting for subsidies and inflation, as the MicroBanking Bulletin did, shows whether an institution could survive on commercial terms. That is the question behind the move from NGOs to banks.
Beyond financial ratios
Financial ratios do not show whether clients are better off. Social performance management and client protection standards fill that gap.