Economics Microfinance Questions Long
Microfinance financial sustainability refers to the ability of microfinance institutions (MFIs) to generate enough revenue to cover their operational costs and maintain their financial viability in the long run. It is crucial for MFIs to achieve financial sustainability in order to continue providing financial services to low-income individuals and small businesses.
The measurement of microfinance financial sustainability involves assessing various financial indicators and ratios. Some of the key measurements used to evaluate the financial sustainability of MFIs are:
1. Operational Self-Sufficiency (OSS): OSS measures the ability of an MFI to cover its operating expenses through its own revenue generation. It is calculated by dividing the total operating revenue by the total operating expenses. A higher OSS ratio indicates a higher level of financial sustainability.
2. Portfolio-at-Risk (PAR): PAR measures the quality of an MFI's loan portfolio by assessing the percentage of loans that are at risk of default. It is calculated by dividing the total outstanding loan balance that is overdue by the total loan portfolio. A lower PAR ratio indicates better financial sustainability as it signifies lower credit risk.
3. Return on Assets (ROA): ROA measures the profitability of an MFI by assessing its ability to generate earnings from its assets. It is calculated by dividing the net income by the average total assets. A higher ROA ratio indicates better financial sustainability as it signifies higher profitability.
4. Cost-to-Income Ratio (CIR): CIR measures the efficiency of an MFI by assessing the proportion of operating expenses to operating income. It is calculated by dividing the total operating expenses by the total operating income. A lower CIR ratio indicates better financial sustainability as it signifies lower operating costs.
5. Loan Portfolio Yield (LPY): LPY measures the interest income generated from the loan portfolio. It is calculated by dividing the total interest income from loans by the average outstanding loan portfolio. A higher LPY ratio indicates better financial sustainability as it signifies higher interest income generation.
6. Financial Self-Sufficiency (FSS): FSS measures the ability of an MFI to cover both its operating expenses and the cost of funds through its own revenue generation. It is calculated by dividing the total operating revenue plus the total interest expense by the total operating expenses plus the total interest expense. A higher FSS ratio indicates a higher level of financial sustainability.
These measurements provide insights into the financial health and sustainability of MFIs. By analyzing these indicators, policymakers, investors, and stakeholders can assess the performance of MFIs and make informed decisions to support their sustainability and growth.