Financial Management OF Micro-Credit Programs

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INTFRNATIONAl
ERRATA SHEET
Financial Management of Micro-credit Programs
P. 53 Last line should read: The Liquidity Adequacy Ratio

(Formula 13) measures liquid assets as a proportion of
the next month's total credit demand.
P. 56 Title of Box with Formula 17 should read: Ratio of Fixed

or Variable Costs to Current Portfolio
P. 65 Formula at bottom of page should read:

Installment payment =P x i x (1 + i)"
(1 + i.)" - 1
P. 70 Second Component of Table III should read:

Expected loan loss
P. 89 The fifth variable listed in the top box should read:

Fe = fixed costs
130 Prospect Street. Cambridge. Massachusetts 02139 Phone (617) 492-4930 FAX (617) 876-9509 0 Pri""J 0" r,cycl,d p.p,r
OF
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A GUIDEBOOK FOR NGOs
by Robert Peck Christen
ACCION INTERNATIONAL
JUNE 1990
TABLE OF CONTENTS
Foreword XI
Acknowledgements , XIII
CHAPTER I
I INTRODUCnON 1
CHAPTER II
II INFORMATION SYSTEMS 5
II.A HARDWARE CONFIGURATIONS 8
II.A.1- Capacity 8
II.A.2 Compatibility 9
II.A.3 Features 10
ILA.4 Technical support 10
ILA.5 Protection 11
II.B SOFTWARE DESIGN 11
II.B.1 Client-management systems 13
II.B.1.a Maintain general client information 13
ILB.1.b Maintain client's business information 14
II.B.1.c Track individual loans 17
II.B.1.d Summary portfolio statistics 20
II.B.1.e Maintain client credit history 21
II.B.1.f Emit loan documentation 21
II.B.1.g Provide information on expected financial flows 21
II.B.2 Fund accounting system 22
II.B.2.a Generation of '!egal' general ledger and financial statements 23
II.B.2.b Generate receipts and journal entries 25
II.B.2.c Handle independent funds (cost centers) separately 26
II.B.2.d Handle cost centers within funds 26
II.B.2.e FleXible consolidation capabilities 26
II.B.2.f Budget comparison 27
vi II.B.3 System security measures 27
II.B.4 Additional tips on software development 27
II.B.4.a Select a fourth-generation programming language 27
II.B.4.b Seek maximum clarity in programming goals and tasks 28
II.B.4.c Seek design and functional simplicity 28
II.B.4.d Do not let programmers become indispensable 29
II.C BRINGING COMPUTERIZED INFORMATION SYSTEMS ON-LINE 29
II.C.l Hire additional personnel during start-up phase 29
II.C.2 Standardize administrative procedures and methodologies 30
II.C.3 Involve key members of the existing staff in the process 30
II.C.4 Program computer utilization to avoid bottlenecks 30
II.C.S Garbage in, garbage out 31
11.0 FUND ACCOUNTING 31
11.0.1 Key features of fund accounting 31
11.0.2 Nomenclature 31
11.0.3 Treasury fund 32
11.0.4 Administration fund 33
11.0.5 Program funds 33
11.0.6 Tips on Fund Accounting 33
II.D.6.a Keep accounts lists simple 33
II.D.6.b Assign transactions to funds before check authorization 34
II.D.6.c Double-check all entries before entering into general ledger 34
SAMPLE REPORTS
Sample Report 1: General Information Report 13
Sample Report 2: Alphabetical List of Borrowers 13
Sample Report 3: Client's Business Information 14
Sample Report 4: Portfolio Report: General Summary 15
Sample Report 5: Fund: General Sl!mmary 16
Sample Report 6: Outstanding Loans 17
Sample Report 7: Loans (Maturity) 18
Sample Report 8: Loans Due, by Field Worker 18
Sample Report 9: Overdue Loans 19
Sample Report 10: Portfolio at Risk 19
Sample Report 11: Arrearage Report: Summary 20
Sample Report 12: Arrearage Report: By Field Worker 20
Sample Report 13: Data on Participant 21
Sample Report 14: Balance Sheet 24
Sample Report 15: Income and Expense Statement 25
TABLES vii
Table I: Voltage Regulating Equipment 11
CHAPTER III
III FINANCIAL ANALYSIS OF PROGRAM PERFORMANCE 35
liLA CREDIT RISK 42
IlI.A.1 Delinquency and defaults 42
III.A.2 Causes for default 43
111.8 INVESTMENT RISK 47
111.8.1 Spreads 47
111.8.2 Spreads and self-sufficiency 50
III.C.LIQUIDITY RISK 50
III.C.1 Projecting credit demand 51
III.C.2 Projecting need for new funds 53
111.0 OPERATING RISK 54
111.0.1 Tools for measuring administration efficiency 55
111.0.2 Loan size 56
FORMULAS
Formula 1: Operational Self-Sufficiency 38
Formula 2: Financial Self-Sufficiency 39
Formula 3: Return on Equity 40
Formula 4: Return on Assets 41
Formula 5: Return on Earning (Productive) Assets 41
Formula 6: Delinquency rate , 45
Formula 7: Exposed Portfolio Rate 46
Formula 8: Repayment Rate 46
Formula 9: Portfolio Quality Indicator (Loan Loss Rate) 47
Formula 10: Simple 'Historical' Spread 47
Formula 11: Spread 48
Formula 12: Liquid Reserves Ratio 54
Formula 13: Liquidity Adequacy Ratio 54
Formula 14: Cost per Dollar Lent 55
Formula 15: Operating Efficiency 55
Formula 16: Ratio of Variable Costs to Total Loan Disbursements 55
Formula 17: Ratio of Variable Costs to Current Portfolio 56
Formula 18: Ratio of Variable Costs to Total Operating Costs 56
TABLES
Table I: SELF-SUFFICIENCY CALCULATIONS 39
Table II: NEGATIVE INTEREST 40
Table III: PROPESA OPERATING SPREAD 49
viii Table IV: AVERAGE LOAN SIZE 53
Table V: MINIMUM LOAN SIZES 60
WORKSHEETS
LIQUIDITY MANAGEMENT WORKSHEET 52
MINIMUM LOAN SIZE WORKSHEET 57
DIRECT COSTS OF LOAN 58
CHAPTER IV
IV SETTING INTEREST RATES AND OTHER FEES STRUCTURES ...61
IV.A TYPES AND METHODS OF INTEREST-RATE CALCULATIONS ..64
IV.A.1 Nominal rates of interest 64
IV.A.1.a Flat interest rate 64
IV.A.1.b Interest on average outstanding balances 65
IV.A.2 Effective rates of interest 66
IV.A.3 Real ratt3s of interest 68
IV.B RECOMMENDED TECHNICAL CRITERIA FOR SETIING INTEREST
RATES ON L.OANS 69
IV.B.1 Cost o~ 1unds 70
IV.B.2 Expectad loan loss reserve 71
IV.B.3 Operating margin, 'spread' 73
IV.C EXTERNAL CONSTRAINTS ON INTEREST RATES 74
IV.C.1 Legal constraints 74
IV.C.2 Political constraints 75
IV.C.3 Total borrowing costs 76
IV.C.3.a Direct financial costs 76
IV.C.3.b Transaction costs 77
IV.C.3.c ACC9ssibility costs 78
IV.C.4 Balancing external constraints with micro-credit program needs ..80
TABLES
Table I: INTEREST ON OUTSTANDING LOAN BALANCE 65
Table II: EFFECTIVE INTEREST RATES 68
Table III: INTEREST RATE COMPONENTS 70
CHAPTER V
V SIMPLIFIED BUDGETING AND FINANCIAL PROJECTIONS 83
V.A SPECIFICATION OF TARGET GROUP SIZE AND DISTRIBUTION 86
V.B PRE-FEASIBILITY ANALYSIS 87
V.C PORTFOLIO GROWTH PROJECTIONS .....................................•.....90
V.D DEFINITION OF TOTAL COST STRUCTURE 92
V.D.1 Fixed costs 93
V.D.2 Variable operating costs 94
V.D.3 Financial costs 95 ·IX
V.D.4 loan losses 96
V.E INCOME GENERATION 96
V.F SOURCES AND USES OF FUNDS 97
V.G FINAL COMMENTS 97
WORKSHEETS
PROJECTIONS: MAJOR ASSUMPTIONS 88
PRE-FEASIBILITY WORKSHEET 89
VARIABLE COSTS: ASSUMPTIONS 94
VARIABLE FINANCIAL COSTS: BASIC ASSUMPTIONS 95
FOREWORD
This manual is a practical, hands-on guide to financial management of
micro-enterprise credit programs. It is aimed primarily at those executive directors,
financial and accounting IJfficers and other managers directly involved in the
implementation of such programs.
The majority of micro-enterprise credit programs around the worfd are run by
non-governmental organizations. Many have limited resources yet, as part of their
efforts to expand, find it necessary to develop more complete and sophisticated
financial management systems. This manual should be particularly helpful to these
organizations. Others, such as bi-Iateral and mu~i-Iateral institutions, foundations,
government agencies, and consu~ing entities will hopefully also find it useful as a
tool in designing, assisting and evaluating programs.
The manual draws on the collective experience of the affiliate organizations of

ACCION International throughout Latin America. The material include'j was tested
and utilized in a series of financial workshops for key personnel of these organizations
organized by ACCION and led by the author, Robert Christen, over the past two
years.
The need for non-profit organizations to expand their credit outreach to many
more micro-entrepreneurs in developing countries will only increase in the future.
To meet tlii~ demand such organizations must become serious intermediate
financial institutions. It is our hope that this manual will provid3 some of the
essential 100Is needed to speed this process along.
William W. Burrus
Executive Director
ACCION International
"
ACKNOWLEDGEMENTS
Funding from the Calmeadow Foundation made this manual possible. I wish
to acknowledge our appreciation for their support.
The Inter-American Foundation and the GEMINI Project of Development

Alternatives Inc. have provided funding for the publication of this manual in both
english and spanish.
The material and concepts for this manual resulted from a series of visits to
micro- enterprise programs, affiliates of ACCION International. Martin Burt,
Francisco Otero, Pedro Jimenez, Benito Cabello, Mirta Olivares, Carlos Castello
and Manuel Montoya opened the programs to me and willingly discussed sensitive
aspects of financial management. Bill Burrus, Steve Gross, and Cathy Quense
provided helpful comments on the first draft.
I would like to recognize the efforts of Maria Otero who provided extensive
comments on the first draft and Diego Guzman who prepared the document for
printing.
Photograph: StNn JohanSM
I INTRODUCTION
/). /
;;
The informal se.ctor is the largest and, in many countries, the fastest growing
part of the pri'late sector. Micro-businesses will generate a majority of the 120,000
jobs per day ~hat will be required in the developing world between now and the
year 2000, particularly those needed by women, recent immigrants from rural
areas, the uneducated, youth, and the very poor.
In Lagos, for example, 50% of all employment is in the informal sector. In

Bombay, the figure is 55%. In Lima, it is estimated that 78% of the furniture and
90% of the clothing are produced in the informal sector and that 85% of bus
transportation is informal. In San Salvador, 85% of the houses in the poorest
barrios are homo to a business.
Recent research and project experience have shown that it is possible to assist
even the smallest economic activities of the poor effectively and efficiently. Simple
infusions of small amounts of credit ($10 to $500) over a period of one to twelve
months, coupled with appropriate orientation and encouragement, can lead to
significant increases in income, production, and em~loyment. The best of these
assistance programs combine quick access to credit with the best management
techniques of the private sector, thereby enhancing the number of micro-
entrepreneurs that can be reached efficiently and inexpensively.
Consequently, international donor agencies are significantly increasing funding

levels to micro-business credit programs. The majority of these credit programs
are managed by small, non- profit, private development agencies. The availability
of these new resources presents non-governmental organizations (NGOs) with
haretofore unseen opportunities for growth.
If NGOs are to meet the challenge of reaching even a relatively small percentage
of needy micro-businesses they must design and implement effective financial
Financial Management of Micro-Credit Programs
4 management systems. Successful micro-enterprise lending requires a high

volume of transactions relative to the total amounts lent, which translates into a
need for tremendously efficient operations. NGOs, constituted in many cases to
implement social or charitable programs, must usually make adjustments in
their basic administrative structure to accommodate this activity.
This manual offers basic financial management tools to executive directors,

financial managers, and accountants of NGOs who administer micro-enterprise
credit projects. Financial directors of micro-enterprise credit projects implemented
by other types of institutions, such as credit unions or development banks, may
al~o find this manual useful.
This work grows out of the project experience and future program needs of
35 ACelON International affiliated micro-enterprise credit projects throughout
Latin America. These programs currently disburse over two million dollars monthly
to more than 40,000 participating tailors, cobblers, mechanics, street vendors,
and the like. Repayment is almost 100%.
As a result, the recommendations contained in this manual reflect the credit

and program methodology utilized by ACCION International. Project goals, such
as reaching large numbers of micro-businesses and reaching financial
self-sufficiency in the medium term, are assumed. Techniques and examples
presented in this manual are a selection of the more effective techniques and
policies used by participating institutions.
This manual is a practical, hands-on treatment of specific issues that are

particularly important to credit-program operators. It does not repeat general
themes of financial management found in standard texts, nor does it attempt to
be exhaustive in covering all of the available techniques in a particular area. It
concentrates on workable solutions that are easy to implement in institutions
with scarce human and material resources by non- specialized personnel.
Photograph: Sergio Solano
II INFORMATION SYSTEMS
Information systems are the heart of good financial management; without them,
good managers can't manage. Information systems must provide timely and
accurate data about institutional activities in an efficient (low-cost) manner. A
system must be relatively easy to maintain and operate. It must allow for dynamic,
changing program needs. It must incorporate necessary security measures to protect
confidential or sensitive information.
When managers can sit down at the end of each day, week, month, or year
and analyze all the key variables, they can make informed decisions that balance
conflicting program needs. Only up-to- date and effective information systems
can provide managers with the detailed data necessary to fine-tune program
performance.
Developing a good information system requires the investment of substantial

resources (human, financial, creative) as well as discipline. To maintain up-to-date
information systems requires methodical, painstaking work every day of the year.
It requires constancy.
We freq'~ently see management by "crisis" due to inadequate information

systems. Managers become aware of problems only when those problems are
too big to resolve easily. Information systems that can't provide managers with
timely detailed in~ormation on all aspects of operations ensure that managers
will simply rush from one frantic analysis to another, completely losing the big
picture. Micro-enterprise credit programs simply move too fast.
Good information systems appear expensive. Most NGOs prefer to allot their
scarce resources to serving the poor, to the detriment of information systems.
Unfortunately, service quality usually suffers in the end because NGOs do not have
PreYloa' Page Ilad

Financial Management of Micro-CrBdit Programs
8 a clear picture of either their client's characteristics or their awn service-delivery

capacities. This is particulariy true for NGOs who manage micro-credit programs.
Today we are in the incipient stages of the "Information Age". More than ever
before, the solutions to mankind's problems are seen to lie in access to and
utilization of information. Men and women who manage computers dominate in
this age. They set the standards; they are on the competitive cutting edge.
We in micro-business credit programs are no exception. Computerized

information systems allow us to reach far greater numbers of participants more
efficiently than ever before. Without question, the computerization of information
systems is essential for micro-enterprise credit programs. Computers offer the
only real possibility of ensuring massive program impact and long-term
sustainability. Computers free scarce resources for other, more "productive" uses.
However, managers must understand that bringing computers on line in their

institutions is a complex process. They must opt for simple solutions rather than
succumb to the temptations of an apparent panacea. More than anything else,
they must realize that computerization will not eliminate administrative chaos; it
will only exacerbate it. Managers must first eliminate chaos so that computers
can be useful management tools.
II.A HARDWARE CONFIGURATIONS

Even for the well informed, the array of possible hardware configurations
(combinations) is confusing. One can rapidly get lost in salesman's talk about
bytes, RAM, ROM, and configurations. The bottom line is that tlardware decisions
are far less important than decisions about software and computer management.
Aside from two or three basic variables, equipment availability and price should
probably play the greatest role in deciding what hardware combination to use.
These basic variables are discussed below.
II.A.1 Capacity
There are many ways to measure a computer's capacity, computing speed,
disk access speed, user available memory, storage capacity, and other main
features. The fact is that during the initial three- to five-year start-up phase, most
new microcomputers are more than adequate for the purposes of micro- business
credit program management, especially if they have a hard disk of at least 20
MB. It is easy to overestimate the usefulness of computer capacity. A well
Information Systems
conceived information system can operate efficiently witn computers of very 9

limited capacity. For instance, in Lima, Peru, ACCION Comunitaria de Peru (ACP)
managed a $1.5 million portfolio with over 6,000 beneficiaries for years with an
IBM XT with only 10MB of hard disk capacity. While not ideal, the eystem
provided the minimum data necessary to manage a program whose loan
delinquency rate was less than three percent of its current portfolio and which
handled about 500 loans a month.
The principal capacity bottleneck with microcomputers is not the individual capacity
of each machine, but rather terminal access time. The large volumes of data that
must be entered to maintain the system up-ta-date are usually more than one
machine can handle in a medium-sized program. We highly recommend that programs
with over a thousand active participants have at least two fully operative computers.
The optimal hardware distriblJtion is probably to have at least one relatively

new "high" capacity microcomputer with 30 MB hard disk capacity and two or
three other computers with a smaller capacity, for entering data, word- processing
(printing loan documentation), budgeting, and accounting. The high capacity
computer should have a micro-processing chip that allows for processing at least
at 8 MHz. Otherwise, large databases can take too long to process.
It is usually more comfortable to purchase the auxiliary computers with hard-disk

capacity since programs can be resident in the memory and there are fewer
problems with the operation. Hard disks are now so inexpensive that one doesn't
save much by buying a computer with two disk drives.
II.A.2 Compatibility
For the past decade or two, IBM has set the industry standard for microcomputers
with business applications. A tremendous variety of hardware and software
systems has grown up around IBM. Therefore, it is generally advantageous to
buy equipment that is IBM-compatible.
What is indispensable is that all of an NGO's computers be able to talk among

themselves with no difficulty, the only possible exception being a computer used
exclusively for word-processing. It would create serious bottlenecks if the primary
program computers were not 1000t'o compatible. In an emergency, functions could not
be transferred to other functioning computers. If program needs change over time and
one needs to expand the software, incompatible hardware could limit possibilities.
10 II.A.3 Features
One of the most fun but lesst essential parts of hardware packages are special
features such as color monitors, graphics capabil~ies, modems, specialized printers,
and external disk drives. Unless NGO managers have a surplus of funds available
to purchase equipment, these features are probably not necessary and will probably
not improve the productivity of the system.
One key feature, which is always tempting to employ when users have more
than one microcomputer, is communications software. This software allows
computers to ''talk'' to each other. Simple communications programs (Brooklyn
Bridge) allow one computer to treat the disk drives of another computer as though
they were its own. The "slave" computer is dependent on the "master" computer.
Operators can not work independently on both machines simultaneously.
More sophisticated programs allow the partitioning of hard-disk capacity on

one computer for use by other computers simultaneously, although they cannot
necessarily do the same function simultaneously. Even more sophisticated
software and hardware combinations allow completely interaL1ive oporation
among microcomputers.
Basically, the cost of these more sophisticated systems is more than they are
worth to micro-credit programs. It is usually sufficient to distribute functions among
separate microcomputers and then "dump" data for processing to a central
computer through diskettes or simple dummy modem communications software.
This solution costs less than U.S.$200 and is adequate. Interactive
communications systems may cost as much as the basic hardware itself.
II.A.4 Technical support

The quality of technical support and maintenance service in a particular country
for a particular computer is a vital concern. Due to harsh conditions such as
dust, voltage irregularity, temperature extremes, and misuse, computers are
relatively more exposed to damage than they are in developed countries. It is
essential that NGOs have access to high-quality local service and technical
support for the equipment they purchase. Otherwise, in a relatively short period,
they may find themselves without a functioning computer due to the unavailability
of spare parts or knowledgeable technicians.
It is sometimes useful to sign a maintenance agreement that will ensure against

rapid deterioration in unfavorable conditions. Certainly, institutions should budget
Information Systems
computer maintenance into their general opel"'dting expenses in accordance with 11

the cost of replacement parts (given local tax treatment).
II.A.S Protection
Voltage irregularity in energy supply to computers can cause problems ranging
from excessive wear and shortened work life to outright burn-up of mother-boards
(the main computational unit, representing 70% of the value of the computer).
In most developing countries NGOs should invest in vo~age-regulating equipment
according to the severity of the problems encountered locally.
There are three basic types of equipment:

TABLE I
VOLTAGE-REGULATING EQUIPMENT
TYPE ESTIMATED COS'T, FUNCTION
Voltage Power Regulator U.S.$200·350
Protects against spikes in supply to computer
UPS U.S.$1000
Provides uninterrupted power supply in case
of external power interruption .(black-out).
Provides some spike protection and smoothes
out wide fluctuations In voltage.
Line Conditioner U.S.$1500
Smoothes out power supply within
pre-determined range (on better models user
sets range). This IS ideal for extending a
computer s work life, particularly in situations
w~ere brown-outs are convnon.
II.B SOFTWARE DESIGN

There is a wide variety of excellent software available commercially for use
on IBM-compatible computers. However, most NGOs will find that the combined
demands of portfolio management and fund accounting will require them to
develop specialized software.
Most NGOs that host micro-enterprise credit programs should be using fund
accounting, a cost-accounting system that separates income and expenditures
according to the source of funds (cost centers). Basic accounting reports can be
generated either on a fund level or consolidated into a general monthly or annual
12 financial statement. The only commercially available fund- accounting program

(Accountmate) is in English and designed to be used in the U.S., so is not wholly
compatible with Latin American accounting systems. Commercially available cost-eenter
accounting packages that are compatible with those systems and that could be easily
adapted to fund-accounting needs can be found in most Latin American countries.
Most certainly, loan portfolio packages are available in Latin America that could
also be adapted to the needs of micro-credit programs. However, adding the
client information NGOs need to track credit impact and integrating this package
with the fund- accounting package would probably cost more than tailor-made
software that would directly meet the NGOs needs.
The cost of developing a locally generated software package that integrates

the accounting and portfolio-management functions is probably between 3,000
and 6,000 dollars. We highly recommend that NGOs who are considering the
management of a sizeable micro- credit portfolio invest in software development
in the early stages of program implementation.
Several integrated packages are available from ACCION-affiliated programs that

can serve as the basis for such a system, although the local institution will probably
find that it will cost about as much to adapt these programs as it would to write a
new one. The advantage to writing a new program is that it is easier to tailor the
program to the idiosyncracies of the local NGO. The advantage of adapting a tested
product is that it will b6 on-line more quickly, and pose less risk of major programming
problems. In either case the decision will depend on local programming capabilities
and the specific changes the NGO wishes to incorporate.
NGOs who manage micro-credit programs face two major information tasks:
1) tracking client participation in the program through credt and technical assistance,
and 2) fund (cost-center) accounting. Each of these tasks is ideally suited to
automation (computerization) and should be integrated.
The first system (client management) contains all the client- specific information
that institutions need to operate and report on activities. The second system
(accounting) manages the accounting ledgers. Client accounts payable and
receivable (sub- sub-accounts) are managed in the client-management system,
similar to the standard Claccounts receivable" software packages commercially
available. The interface may be either electronic or manual (preferably electronic)
and consists of a summary statement of the daily movements in client accounts.
This system is an integral part of the entire accounting system.
Information Systems
11.8.1 Client-management systems 13

Any complete client-management system should include the following
minimum functions. The report formats shown here are only illustrative;
each program will have to decide how it needs this basic information broken
down for analysis. For some the basic unit of analysis might be a geographic
area, for others the credit agent, or the fund to which the credit belongs.
I/.B.1.a Maintain general client information
The system should maintain information clOOut all program participants: names,
10 numbers, addresses, phone numbers, type of business, references, sex, age,
and other pertinent general data. The system should emit periodic reports with tnese
client- identifying characteristics, ordered alphabetically. Two types of client list are
shown below; sample Report 1 is a client list used by field staff to locate program
participants and contains addresses and telephone numbers, in addition to key
identification numbers. Sample Report 2 is a client list for office use which interrelates
all relevant identification numbers used internally for data verification and file location.
SAMPLE REPORT 1
No.1
GENERAL INFORMATION REPORT
LOAN SYSTEM
FIELD WORKER 001 - GABRIEL ARAYA GAETE
PARTICIPANT ADDRESS
No. NAME ADDRESS PHONE FIRM ACTlVnY
000132 LOPEZ, MARTA SANTIAGO, 428 SAN JOAQUIN SAME SEAMSTRESS

000138
SAMPLE REPORT 2
No.2
ALPHABmCAL LIST OF BORROWERS
DATE: 2112188
PAGE 1
LOAN SYSTEM
PARTICIPANT No. No. 1.0. FIELD

NAIE OPERATION CLIENT No, WORKER
AGUILERA, MORENA A. 02200020-01 00020 8,592,2n·o 001
AHUMADA, LEIVA R. 04012001-01 00110 9,218.025·5 003
ALCALDE, ALVAREZ S. 02022006-01 00006 7,898,895-0 004
14 11.8. 1.b Maintain client's business information

In order for NGOs to measure credit impact on micro-businesses it is essential
that they create and maintain databases with client's socio-economic and financial
data. This includes business data such as employment levels and classification,
levels of sales, equipment, inventories, and monthly expenses; and
socio-economic data such as number of dependents, educational level, marital
SAMPLE REPORT 3
No.3
CLIENT'S BUSINESS INFORMATION
LOAN SYSTEM DATE: 1115189
1.0. No. 789321 ALCALDE ALVAREZ SERGIO ANTONIO
PRODUCTIONISERVICE: Furniture
YRS. EXPERIENCE:
No. EMPLOYEES:
DATE OF APPLICATION:
..
1 yr.
9127188
EMPLOYEES FAIILY NON-FAIILY
Full-time 00 .-
Piece workers 00 00
Part·tlme 00 00
CUrrent .....ta Cur,.t LllblilllM

Cuh Accounts Payable
Bank Loans Payable
Accounts Receivable Accrued Liabllitie.
Inventories Advances for production
Raw Material Other
Unfinished Products
Finished Products Long-Term Debt
Other
NonoCurrent
Machinery
.M" Mortglge
Bankl
Other
Tooll
Supplies
Vehicle.
Property Total LlebllltlM (Eligible)
OtheAaMt. CIIpltal
Tot8IAaMta 1 PRoogo Totll CIIp"ll Ind Lllbilltiel 1 PROogo
a.... Totll sell.

Paid cash
On credit
Other
EIpen8u Tot8IIJpe1I1••
Raw Material Grose Utility
LIIbor Peraonal Sllary
~nt
Gal, UtUlties Profit from .........
Transport
Talephone
Depreciation
Other &pen...
Information Systems
stetus, and personal capital accumulation, as shown in Report 3. This data is 15

normally monitored in monthly reports that classify the current portfolio by relevant
impact variable, as in the example shown in Report 4 (current portfolio), and
Report 5 (this month's disbursements). This data may be analyzed later with
statistical packages such as SPSS or SAS.
SAMPLE REPORT 4
No.4
CURRENT PORTFOLIO REPORT
GENERALSUMARY
LOAN SYSTEM PAGE 1
DATE: 2114/89
No. BALANCE
SEX OPERATIONS (PESOS)
MALE 97 7,318,288
FEMALE 18 958,347
ACTlVrrY
25. FOOD PROCESSING 6 322,028
26. SEAMSTRESSESfTAILORS 10 510,302
27. WEAVING 7 454,782
28. SHO~MAKING 12 916,382
29. CARPENTRY 16 1~154,172
30. METAL WORK 20 1,675,888
...
35. REPAIRS (AUTO) 2 97,149
No. DEPENDENTS
0·1 3 131,900
2·3 16 1,098,876
4·8 18 5,767,987
7·99 18 1,278,765
SIZE OF LOAN
0·3‫סס‬oo 8 158,835
31000·5‫סס‬oo 34 1,397,530
51000 • 7‫סס‬OO 24 1,765,606
·99999 0
°
SIZE OF ENTERPRISE
0·25000 10 316,639
25100 • 5‫סס‬oo 19 912,738
51000·1‫סס‬oo0 37 2,520,579
16 SAMPLE REPORT 5
No.5
TOTAL LOANS DISBURSED
(LAST TO DATE)
FUND:GENERALSUM~RY
LOAN SYSTEM DATE: 2114189
No.
SEX TRANSACTIONS AMOUNT
FEMALE 2 ... 40%

MALE 3 ... 60%
TOTAL 5 325,527 100%
ACTlVnv*
353 SHOEMAKING 1 38,270 11,7-$%
362 FURNITURE 2 122,731 37,70%
386 CARPENTRY 1 100,936 31,01%
901 ELECTRICAL REPAIR 1 63,590 19,53%
TOTAL 5 325,527 100%
No. DEPENDENTS
0·1 1 ..... ...
2·3 2 ..... ...
4·6 2 ..... ...
7·99 0 ..... ...
TOTAL 5 325,527 100%
SIZE OF LOAN
0·30000 0 0
.....
.........
31000 • 5‫סס‬oo 1
51000 - 70000 2 .....
70001 • 100000 1 .....
1‫סס‬oo1 • 150000 1 ..... ...
TOTAL 5 325,257 100%
SIZE OF FIRM
0·250000 2 .....
251000 - 50‫סס‬oo ,3 ..... ...
'"
..... ·9999999 0 ..... ...
TO".4L 5 325,527 100%
EIFLOYEES
FAMILY (FUll TIME) 0
INDIVIDUAL (FUll TIME) 9
FAMILY (BY PIECE) 0
INDIVIDUAL (BY PIECE) 2
FAMILY (PART TIME) 0
INDIVIDUAL (PART TIME) 0
TOTAL 11
• Numbe,. filled In u example of information obtained.

Information Systems
II.B.1.c Track individual/oans 17

The client-management system must be capable of tracking individual loan
performance. Data about the loan due data, amortization schedule, and late
repayments provide the raw material for credit agents and field staff to effectively
manage their assigned portfolio. The system should produce lists for each of the
field staff, listing current portfolios (Report 6), loan and payment due dates
(Reports 7 and 8), and individual loan performance for each of their clients
(Reports 9 and 10).
These reports should be produced either daily or weekly, depending on the

urgency of the response required. Some of these reports may contain pertinent
information about the client's address or phone number which can facilitate the
field agent's response.
SAMPLE REPORT 6
NO.6
OUTSTANDING LOANS
LOAN SYSTEM PAGE 1

DATE: 2107189
FIELD WORKER: 001 • GABRIEL ARAYA
TYPE LOAN: 2 • WORKING CAPITAL
DATE DATE ANAL

N/ME LOAN litITE· NEXf LAST PAV·
No. ....>RAC). AMOUNT t'EAIOD REST GRACE AMOUNT PAY· PAVe MENT
IOPERATION WER LOAN (IIonth1) (Monlly) PERIOD PAYMENT IIENT IIENT DUE
0220000301 LOPEZ 44.088 () 2.5% 0 6.036 3/14189 12106188 O8t'2O.'n

JOSE
0220000401 LARA 68.880 6 2.5% 1 13,8A2 2110/89 11/16/88 0312018I

RAUL
0220000501 iLOBOZ
.JUAN
••592 5 2.5% 0 21.222 2114189 11122188 avo,.
Financial Managsmsnt of Micro-Credit Programs
18 SAMPLE REPORT 7
No.7
LOANS (MATURrTY)
MICRO-COMMERce
DATE: 1/13189
NAME
DATE NAME No GROUP
LOAN FIELD SOUDARITY LOAN PAY. PAY~ DATE COOR·
DUE WORKER GROUP CODE No. AMOUNT I NT. t MENT UENTS DlS8.1 DlNATOR
1116189 06 WHITE 5156 1694 2500 2.0 13751 14 9126188 CAI.LE,

ROSES JUAN
1/16189
1 Interest (Monthly)
2 Disbursement
SAMPLE REPORT 8
No.8
LOANS DUE IY FIELD WORKER
FROM 3131. TO 314111
DATE: 3114189
LOAN SYSTEM
FIELDWORKER: 001 GABRIEL ARAYA
No. TERMS No. DATE

rntANSACTION NAME AMOUNT WEEKS PAYMENT PAYMENTS DUE
040128 ROJAS, MARTA 74,447 6 16,486 2 3/4189
OG20
TOTAL FOR FIELD WORKER 428,377 90,261

Information Systems
SAMPLE REPORT 9 19
No.9
OVERDUE LOANS
DATE: 03/14I8A .
LOAN SYSTEM
FIELD WORKER: 001 GABRIEL ARAYA.
TYPE: WORKING CAPITAL
TRAN- DATE
=:; No.
OF
FIRST
PAY·
LAST
PAY· OVER- 5 TO 18 TO THAN
MeRE
No. NAME LOAN UENT AMOUNT BALANCE UENT DUE 15 DAYS 30 DAYS 30 DAYS
1000:2004 LARA, 03 1/16188 63,800 51,324 .314189 25,028 00 12,668 12,668

PEDRO
TOTAL 101 TRANSACTIONS 9,084,085 5,905,431 267,24894,761 109,541 65,946
15 OVERDUE LOANS 4.5% 1.6% 1.8% 1.12%
SAMPLE REPORT 10
NQ. 10
DATE: 31104188
PORTFOLIO AT RISK
WORKING CAPITAL
-
MORE
FIRST DATE THAH
TRANlAC- No. PAY· LAST DEUN- 1-15 18030 30
!nON No. NAME LOAN UENT AMOUNT BALANCE PAYMENT QUENr DAYS DAYS DAYS
LARA 01 01/15188 83,380 51,324 01104180 25,028 0.00 0.00 51,324

RAUL
LOBOS 01 02120188 98,592 40,905 02101189 20,200 0.00 40,905 0.00

PEDRO
... ... ... ... ... ... ... ... ... ... ...
TOTAL 101 OPERATIONS 8,cv.w,065 5,lJ08,<t31 287.2. 2.',C35 318.325 306,207
15 OVERDUE OPERATIONS •.53% •.08% 5.'U 5.18%
Finsnciaf Management of Micro-Credit Programs
20 I.B.1.d Summary portfolio statistics

Another function any portfolio-management information system should perform is
to track general portfolio performance. Information about levels and evolution of late
repayments, amounts disbursed and recovered, the current portfolio, and numbers
of active clients are critical for upper-level managers (Report 11). This information
should appear in summary form and be disaggregated in categories such as: field
staff, region or branch office, or other criteria that managers need to evaluate the
relative performance of different actors within the institution (sample Report 12).
SAMPLE REPORT 11
No. 11
DATE 3/14189
ARREARAGE REPORT
SUMMARY
MORE
TRANSAC- AMOUNT BALANCE DEUN- 5-15 16-30 THAN
DATA TlONS LENT DUE QUENT DAYS DAYS 30 DAYS
WORKING CAPITAL 101 9,084,055 5,905,431 267,243 94,781 106,541 85,948

TOTAL IN ARREARS 15 4.53% 1.60% 1.80% .120/0
EQUIPMENT PURCHASE ..•
TOTAL IN ARREARS
TOTAL LOANS
TOTAL ARREARAGE
SAMPLE REPORT 12
No. 12
ARREARAGE AEPOR'( BY FlELDVlOAKER

FIELD WORKER:. 001 GABRIEL ARAYA GAETE
MORE
TAANIAC- AMOUNT BALANce· iJEUN- 5-15 1140 11fAN 30
DATA TIONS LENT DUE QUENT DAYS DAYS DAYS
WORKING CAPITAL 38 5,823,891 2,870,140 120,545 57,40240,181 22,961

TOTAL IN ARREARS 7 4.2% 2.0% 1.4% .08% .
EQUIPMENT.PURCHASE ....
TOTAL IN ARREARS
...
TOTALLO.~S 44
TOTAL ARREARAGE 9
I
Information Systems
II.B.1.e Maintain client credit history 21

NGOs should be able to access a client's entire credit history with that institution
instantly. This information should include the dates, capital amounts, classification
of payments received on prior loans according to timeliness, and an overall
creditworthiness rating assigned by the computer (Report 13).
SAMPLE REPORT 13
NO. 13
DATA ON PARTICIPANT
DATE: 7/28189
CLIENT NAME OF PARTICIPANT ACTIVITY
00002 aUILAPI CABRAPAN JUAN EDUARDO TAILOR
ADDRESS
Gavls 1729 Carro Navio Santiago
LARGEST LOAN LARGEST PAYMENT STATUS RATING

390,000 83.000 A C
PAYMENTS
TRANSAC- DATE AMOUNT QUARAN- OVERDUE
lION No. START AMOUNT TERMS PURPOSE PAYMENT TEE (DAYS)
0 104 6·15 15-30 +30
020220002.01 10111/88 158,954 6 WEEKS WORKING 28,858 600,000 4 0 1 0 1

CAPITAL
11.8. 1.1 Emit loan documentation

Another function of credit portfolio management systems is to systematize the
en,ission of loan documentation (guarantees, contracts, coupons, and others).
By including the emission of loan documentation in the information system,
institutions save precious time and commit fewer errors. The same data entry
steps used to emit the documentation also serve to enter data into the system,
eliminating the double or triple entry necessary when these steps are done either
22 manually or separately. The inclusion of this process as an integral part of the

information system can reduce the secretarial or keypunch load by as much as
75 percent.
If appropriate verification procedures are used, errors can also be reduced

significantly. Most errors creep into manual or mixed information systems as a
result of copying data several times in different places. These types of errors
are eliminated when there is only one data-entry point in the entire system. In
integrated computerized information systems, care must be taken to enter the
correct data into the system and good verification procedures must be developed.
II.B. t.g Provide information on expected financial flows

Portfolio-management information systems should also generate important
financial data for cash-flow projections. Managers, on the basis of expected
repayments and loan disbursements (utilization of credit lines), can accurately
project cash flows over a 30- to 50-day period. This facilitates effective liquidity
management, a key for any financial institution.
11.9.2 Fund accountlrlg system

Most credit programs receive support from various sources, be these private
donations, private bank loans or soft development loans. Most of these funds
are restricted: institutions must use them in specific activities and must report
on those activities either dUring or after they are completed. Under normal
accounting systems, this requirement creates an administrative nightmare and
NGOs typically spend enormous time reconstructing, disaggregating, and
reformulating financial transactions reports to satisfy donors that their monies
have been used appropriately.
Fund accounting organizes NGO financial transactions according to the source

and use of restricted funds. A well organized fund- accounting system produces
reports instantaneously on the status of anyone of dozens of specific restricted
grants while at the same time consolidating these results into the general
accounting ledger of the institution. Much the same way a large conglomerate
would generate independent' balances for each of several wholly-owned
companies, which it would ultimately consolidate for its own financial statements,
fund accounting generates separate internal financial statements for each
donation (or other liabilities), which it then consolidates into the official external
financial statements.
Information Systems
The advent of microcomputers has put fund accounting within the reach of 23
even the smallest NGOs. A well designed fund-accounting computer package
can assure financial managers that funds are continually balanced, and that
transactions are being correctly recorded. Computerization eliminates much of
the complexity and the potential for error of a manual fund-accounting system.
Modem NGOs should consider fund (cost-center) accounting to be an absolutely
essential administrative tool.
Afund (cost-center) accounting system should include the following capabilities:
- Generate "legal" general ledger and financial statements

- Generate receipts and journal entries
- Handle independent funds (cost centers) separately
- Handle cost centers within funds
1I.8.2.a Generation of "legal" general ledger and financial statements

The fund-accounting system should generate the legally acceptable financial
statements and supporting documentation required by auditors and government
regUlatory agencies. These requirements vary from country to country and so
therefore will specific report formats. Nevertheless, the consolidated reports
generated by the system should be sufficient for all legal requirements, eliminating
the need for parallel, handwritten, "official" ledgers.
These consolidated financial statements probably include, but are not

necessarily limited to:
- General ledger
- Balance sheet
- Income and expense statement
- Trial balance
- Inventory of liquid assets
- Cash flow
Examples of a balance sheet and an income and expense statement follow

in Sample Reports 14 and 15.
24 SAMPLE REPORT 14
No. 14
BALANCE SHEET
TO OCTOBER 1_
PESOS
BALANCE INCREASES DECREASES BALANCE
TO 8-88 TO 10-88
ASSETS
current A...t.-
Cash 25,000 25,000 50,000
Bank 251,660 241,940 19,720
Investment 11,090,998 1,700,000 9,390,998
Accounts Receivable (Funds) 286,660 216,940 69,720
Accounts Receivable 42,907 31,965 74,872
Portfolio Placement 0 749,564 749,564
Various Lenders 348,700 32,718 315,982
Taxes (Receivable) 323,156 38,675 361,831
Total Current Assets 12,379,081 1,346,394 11,032,687
MKhlne end Equipment ... ... ... ...

Total Machine and Equipment ... ... ... ...
OIher ....t.:
Guarantees ... ... ... ...
Total Other Assets ... ... ... ...
Total Assets ... ... ... ...
UABILITIES
Cumtnt Uabilhies
Short·term ... ... ... ...
Accounts payable ... ... ...
Accrued Liabilities ...'" ... ... ...
Current portion of debt (fund) ... ... ... ...
Total lIabllhies short·term ... ... ... ...
Total lIabllhies ... ... ... ...
Ixpen•• ... ... ... ...
Total Statement Fund ... ... ... ...
Total liabilities and
Statement for Fund
... ... ... ...
• Numbers filled in as exampl. of information obtained.

Information Systems
SAMPLE REPORT 15 25
NO. 15
INCOIE AND EXPENSE STATEMENT
TO OCTOBER 1_
PREVIOUS (PESOS)
BALANCE THIS MONTH TOTAL
~OTAL INCOME-:
Technical Auiltance o 25,430 25,430
National Program 17,615,360 o 17,645.360
int.... In Inveatmenta
Other Income
Total Income 18,150,526 116.522 18.267.048
TOTAL EXPENSES
Salaries 1,402,948 852,070 2,255,018
Rent
Utilille.
Insurance
Transport
MaterialstSupplle.
Public Relations
Maintenanc.
Outreach
MieceUaneou.
Loans
Total Expens••
Expense.
• Numbers filled in u excmple of information obtained.
II.B.2.b Generate rscsipts andjoumalentries

As one important way to reduce errors in the information system, the accounting
software should prepare documentation necessary to include transactions in the
accounting system. Once the transactions have been approved, and the check
drawn and delivered, the transaction is registered electronically in the general
ledger. This saves mistakes, which can occur if one prepares the transaction
documentation by hand and then later keypunches it into the system. In this
fashion, whatever is approved is what actually gets entered electronically.
26 1I.8.2.c Handle independent funds (cost centers) separately

Essentially, fund accounting creates parallel account lists for each fund or cost
center. It is the same as having a general ledger for each fund. All movements
of resources between funds is handled through accounts payable to other funds
so that at any point in time all funds balance.
1I.8.2.d Handle cost centers within funds
Anyone donor usually provides resources for a number of major activities,
such as operating expenses, technical assistance, and staff training. These are
actually sub-programs or sub-projects within the fund. It is convenient, although
not essential, that software be able to manage these programs or projects
separately within funds. When NGOs report on the use of these resources, this
capacity reduces significantly the analysis required.
Ideally, the software would allow the NGO to manage both funds and
sub-programs independently. This would allow for even greater analytical power.
This would mean that sub-projects in which several donors participate can be
consolidated electronically, and not just manually, as would be the case in the
above situation.
FUND PROGRAM
01 Patrimony Assets 01 Administration
02 USAID-OPG 02 Credit
03 Tinker Foundation 03 Technical Assistance
04 Guarantee Fund 04 External Evaluation
05 Staff Training
06 Public Education
1I.8.2.e Flexible consolidation capabilities

The virtue of this type of accounting system is that NGOs can "cut" the
accounting data in a variety of ways for different analytical and reporting needs.
The software package should allow the NGO to generate partial financial
statements on any combination of fund and sub-program. This provides timely
and accurate financial information for donor reports and financial management.
These reports should probably be similar to ttte "legal" reports the system
generates on a consolidated basis.
Information Systems
II.B.2.f Budget comparison 27

Financial analysis and reporting can be further expedited if the software package
includes a budget comparison function. With this function the NGO includes the
estimated monthly budget for each of the funds and sub-programs and the
computer compares the final results with the planned results. This is particularly
useful when grant agreements include specific monthly budgets that NGOs must
report on.
11.8.3 System security measures
It is essential that any software include system security measures such as
password entry and control of system use (user list with date, time and functions
accessed). Ideally, all general ledger entries should be made by the accountant,
and not by systems operators. The accounting department should have exclusive
use of their own microcomputer in order to protect against accidental damage
to records or software by other users. Only one person should be responsible
forthe general ledgerentries and final financial statements. Access of keypunchers
should be limited to data entry steps only. Two backup copies of expired months
should be kept, one in a safe and the other in the computer room for restricted
use. Printed copies should be made of all final reports and kept as permanent
records.
Since the Client-management system is an integral part of the accounting

system, the information pertaining to accounts receivable and payable should
be strictly protected in the same wa,t the accounting system is protected. Usually
NGOs will choose to locate the Client-management system on one computer and
the accounting system on another computer. We highly recommend that neither
of these two computers also be used for general user programs such as Lotus,
word-processing, or games. This minimizes the possibility that system users will
accidentally damage the databases through mismanagement of the operating
system. Therefore, most medium sized NGOs will need a third computer for
these functions.
11.8.4 Additional tips on software development
The following are some general tips managers should remember when they
embark on a software development program:
II.B.4.a Select a fourth-generation programming language
Fourth-generation languages are very powerful programming tools for database
management. They simplify the programming steps enormously and are relatively
28 user-friendly. This means that institutions can invest relatively few resources in
training selected personnel in the use of these languages. Eventually these
specially trained staff can effect minor changes in the program at very low cost.
Since institutional needs constantly evolve, software must be updated

continually. This is far easier with a fourth-generation language such as DBASE
11I+ or FOX. Finally, a series of complementary programs are available such as
compilers, screen formatters, report writers, etc. which make the job of
programming even more speedy.
II.B.4.b Seek maximum clarity in programming goals and tasks

Lack of clarity in programming goals and tasks can cause some of the greatest
problems in computerization. Institutions should spend significant time with
programmers before they begin software development, defining the in&iitution's
needs exactly and determining which of those needs are most appropriately met
through computerization. It will be necessary to prioritize the resulting wish list
and focus on the more important tasks.
Once the institution has defined the programming goals and tasks clearly, it
must resist the temptation to modify those goals and tasks. It must modify goals
and tasks only when it is imperative to do so. The delays caused by constant
modifications are the main source of manager's frustration with the
computerization process. Inevitably, the resulting program is usually terribly
inefficient because modifications have to be tacked on and cannot be incorporated
into the core system.
II.B.4.c Seek design and functional simp/icity

We frequently say that '1he perfect is the enemy of the good". Nowhere is that
more apparent than in software development. The temptation to ask the computer
to do all of the drudge work is almost overwhelming. The second most important
source of manager's frustration with the computerization process arises from this
temptation.
The simpler a program, the fastsr it runs and produces results. A simple
program is easily understood and modified without error. A complicated program
is difficult to modify because it is difficult to track down, throughout the system,
all of the repercussions of relatively minor changes.
Information Systems
Complex software should only be developed on the basis of relatively simple 29

program modules that have been independently tested for independent functions.
Managers should not be greedy. They must pick the five or six tasks that involve
the most staff time due to their extreme repetitiveness, and program initially to
solve those problems.
Simplicity in program goals and design will ensure satisfaction.

II.B.4.d Do not let programmers b8c0me indispensable
Some computer programmers are jealous of their work and try to protect it
either by compiling the final version while retaining the source copy, by password
protection, or by producing poor manuals. This is unacceptable and expensive
for users. Internationally, the move is away from software protection and not
towards it. Besides, micro-enterprise portfolio-management software is of very
limited use to other institutions, even should they obtain a copy.
Programmflrs should be sought who are willing to establish an open

communicative relationship with the institution. In the long run this is beneficial
for both parties. Uncommunicative programmers cannot ultimately be good
programmers since they cannot truly understand the institution's needs.
II.C BRINGING COMPUTERIZED INFORMATION

SYSTEMS ON-LINE
Bringing computerized information systems on-line is a time- consuming,
expensive task, especially in the short run. It usually requires institutional
restructuring, procedural revamping, and personnel changes. It also requires
double work for at least three to six months, depending on the complexity of the
system employed. Productivity falls sharply initially and usually the net benefit
is not felt until much later than expected. The following are recommendations
for bringing computerized information systems on-line based on the experience
of several ACCION-affiliated programs. It is not intended to be comprehensive
but rather to mention the most relevant aspects of this process, which has been
the nemesis of many institutions.
II.C.1 Hlr. 8ddlllon.1 personn.1 during stan-up ph• •
Data-entry demands and the demands of learning a new system will unduly
stress existing staff. They will be forced to choose between their traditional
manual duties and their new computerized duties. Since, to ensure accuracy,
30 both systems should be managed simultaneously during a period of three to six

months, they will inevitably neglect one or the other. This creates chaos.
It is usually worthwhile to add a computer specialist to the staff to oversee the

program's implementation. In addition, it is important to hire two to three temporary
staff members to do basic tasks such as data entry, secretarial work, or book-
keeping, in order to manage the parallel systems. It is important that these
additional employees be temporary since the computer will, in the final analysis,
actually reduce the previously existing staff's workload. Usually, constructive and
vital new tasks can be found for previously existing staff who suddenly find
themselves with excess time. If not, attrition without replacement will reduce the
overall staff size.
II.C.2 Standardize administrative procedures and methodologies

To the degree that procedures and policies can be standardized, computers
can be more effective. If, for instance, a loan officer makes different types of
loans with vastly different conditions to each of his or her clients, computer
programs will have to be relatively sophisticated to manage the portfolio.
To the extent that similar policies and routines are followed, the computer
program can be more straightforward. Therefore, managers should standardize
the maximum number of procedures possible, without compromising necessary
program methodologies.
II.C.3 Involve key members of the existing staff In the process

To the extent that key members of the existing staff participate in bringing
computerized information systems on-line and see that they are the primary
beneficiaries of this process, they will be enthusiastic supporters and collaborators.
This is fundamental. If the new system is seen as an appendage, it will not
become an institutional priority and the process will be long and painful. It will
have to be imposed by executive decrAe against opposition and perhaps even
sabotage.
II.C.4 Program computer utilization to avoid bottlenecks

One common problem that institutions face is competition for scarce computer
resources. Unfortunately, the most interested staffers are frequently not those
whose functions are a priority for the institution to computerize. This creates a
Information Systems •
conflid. Managers must ration computer time to ensure that vital tasks have 31
priority over less important tasks.
It is common to see middle managers invest enormous time producing reports

with Lotus spreadsheet programs that could be just about as efficiently produced
by :land and typed. The temptation to "play" with the new toy is difficult to resist.
In fad, staff should be encouraged to experiment with the computer as long as
it doesn't interfere with fundamental tasks.
II.C.5 Garbage In, garbage out
Computers cannot improve on faulty entries. If the data that is entered is
flawed, the reports will be flawed. Computers will not bring order where chaos
previously existed. This is particularly important when making a decision about
entering historical loan and client data. If that data is seriously flawed, and much
of it can be, it will be a waste of time to enter it. If it varies significantly in its
structure, or variables, then it is relatively useless.
Remember, flawed or incomplete data is virtually useless. Having 85 percent

of the necessary data entered will not produce useful reports. When embarking
on a process of data entry, enter only the essential data first for all clients. Enter
the rest at a later date. This will ensure that 100 percent of the necessary data
is entered within a reasonable time-frame. Remember, programs are dynamic
and don't stand still waiting for computerized information systems to catch up.
They keep moving and create an information backlog.
11.0 FUND ACCOUNTING

II.D.1 Key features of fund accounting
The following is a brief description of a series of special charaderistics that
distinguish fund accounting from standard accounting systems and with which
managers should be familiar. By far the most complete Spanish-language
reference on fund accounting is Mella's Instltutlone. no Lucratlvas:
Admlnlstraclon, Contabllld8d por fondos y Controllnterno. For further detail,
managers should certainly use this reference.
11.0.2 Nomenclature
In fund accounting each donation or loan is given a fund number. All of the
transadions associated with that donation or loan are assigned to that fund by
prefiXing the fund number to the standard account number. For example, the
32 account number for office equipment might normally be 11010300, composed of

the following levels:
1 Class Assets
1 Sub-class Fixed assets
01 Account Office Equipment
03 Sub-account Office Equipment
00 Sub-sub account - - - - -
If that equipment were purchased by a restricted grant which the institution

had assigned to be fund number 03, then the complete number for this account
would be 03-11010300.
Some of the more sophisticated fund accounting programs allow up to three

levels of disaggregation; for example, fund, program, and cost center. Since most
grant agreements have several major program activities, each of which has
several major line items, this disaggregation can be very useful when managers
prepare their financial reports. In this case, the complete number might be
03-01-1-11010300.
II.D.3 Treasury fund
The fund-accounting system proposed by Mella uses a special treasury fund
to facilitate cash management. All cash transactions are passed through the
treasury fund, which acts as a repository for the cash from all of the other funds.
This allows institutions to optimize cash management by consolidating cash
transactions in one bank account that:
- increases negotiating power with banks by consolidating all cash

transactions in one place;
- increases savings through the elimination of checks for each individual bank
account;
- reduces workload associated with multiple bank account reconciliation and
other internal controls; and
- facilitates cash transfers between funds in a way that is transparent and easy
for auditors to follow.
The treasury fund only has accounts relating to cash, banks, and accounts
receivable/payable to other funds. It registers no other movement. All cash
received by the project is deposited in the treasury fund and accredited to the
fund for which it is destined. However, since no other fund will have cash or
Information Systems
bank accounts, monies will actually be disbursed from the treasury fund, drawing 33
down on the obligation created in the relevant program fund.
11.0.4 Administration fund

Once grants have expired, remaining resources pass into the general
unrestricted resources available to the ilistHution and no longer have to be
specifically reported on to the donor institution. The administration fund is set
up within the accounting system to consolidate all of these non-restricted
resources. The administration fund also consolidates all other unrestricted
resources such as patrimony and most local donations.
The administration fund normally houses certain non-prog:-ammatic expenses

such as general audits, promotional activities, general assemblies, legal fees
and administrative overhead. Interest income generated by the loan portfolio
may either be reported in the administration fund or in the program funds,
depending on the information requirements of the donor institutions or managers.
11.0.5 Program funds

Program funds are usually set up for each specific restricted donation in order
to facilitate financial reporting. Most computerized systems allow for up to 99
funds, more than enough for any NGO. When grants expire and NGOs no longer
have any responsibility to the donor for reporting on the use of the grant, the
fund is eliminated and the remaining resources passed to the administration
fund.
11.0.6 Tips on fund accounting

The following are some general tips for managers who use fund accounting,
based on the experience of ACCION-affiliated programs that already have
implemented this system.
II.D.6.a Keep accounts lists simple

NGO accountants are used to creating terribly complex lists of accounts in
order to handle the reporting requirements of multiple restricted grants. Typically,
in the accounts list, NGO accountants would create a sub-sub-account for each
account for each donor. For example, office equipment donated by three different
donors would be separated at the level of sub-sub- account in the following
fashion:
34
11010301 Equipment Donor 1
This practice leads to interminable accounts lists and great con,JSioI1.

Accountants seldom maintain the same sub-sub-account number for the same
donor throughout the entire accounting system, because sub-sub-account
numbers are frequently used for other purposes. However, even those accountants
who do maintain the same number throughout the entire system cannelt
consolidate information easily on a sub-sub-account level.
In fund accounting, equipment would have only one account number: 11010300.
Equipment donated by different sources would appear with the fund prefix beforEl
the account number. This allows accountants to remember the account numbers
for all transactions more ea:sily and reduces errors greatly. Analysis is done
outside the accounting system itself through the consolidation process. Account
numbers them::slves are not affected.
Since fund accounting is so po';·'srful, it allows for simplicity at the account

level. Accountants should tak,e advantage of this feature; it will save time and
money.
/I.D.6.b Assign transactions to funds before check authorization
Assigning transactions to different funds requires a management decision at
a relatively high level. The person who designates the fund must be aware of
all of the provisions in each of the grant agreements. Fundamental principles of
internal control and effective administration require that the exact accounting
entries be specified before the check is signed.
II.D.6.c Double-check aI/entries before entering into general ledger
It is far more effective to eliminate errors at their source than it is to repair
sloppy work. Computerized fund accounting uses a great deal of computing time
for each report. In order for errors to be corrected, the adjustments must be run
through the entire process and all of the reports generated anew. The best way
to eliminate these errors is to· review each entry carefully before passing it to
the general ledger. The best process is to have someone other than the
keypuncher review all data entry against the original documents before processing
the general ledger.
-- .,.
.
.,
; ,.;.
Photograph: Miguel Sayaga
III FINANCIAL ANALYSIS OF

PROGRAM PERFORMANCE
Unlike private, for-profit organizations, NGOs seek to maximize service impact
rather than maximize the return on equity. Like all organizations, NGOs would
like to be permanent. NGOs have traditionally sought that permanence through
fundraising to cover operating expenses. This has been an appropriate strategy
given the predominantly charitable activities in which they have characteristically
been involved.
In recent years, NGOs have become involved in development activities and,

more specifically, in income-generation projects for poor people. These activities,
by definition and approach, are not charitable but rather attempt to integrate
marginal actors into the formal economy as fUll-fledged members. In the early
years, governments and international donor agencies were willing to subsidize
these activities heavily. Now they insist that these activities eventually cover their
costs.
This means that NGO micro-credit programs will reach long-run sustainability
when they reach financial self-sufficiency. Programs that generate income for
program participants should also generate sufficient revenue for their own
activities.
We can classify two types of self-sufficiency. The first level is operational

self-sufficiency: income is equal to or greater than expenses. It corresponds to
'nominal' self-sufficiency, where the money earned covers the money spent
(Formula 1). This is the concept of self-sufficiency most commonly used by donor
agencies and development programs to evaluate a program's viability.
Pre910us Page DlaDk

38 Formula 1:
Operational self-Sufficiency
Optll'8tlonBllncome
OpefBtlonsl expenses
This concept of self-sufficiency is inadequate, however, when we wish to

examine long-term viability in an inflationary economy. Inflation affects credit
programs in two important ways. First, it decreases the purchasing power of the
credit portfolio, meaning that it is less and less able to cover the operating costs
of the program, which continue to rise. Although in the early stages of an
increasing inflation expenses also tend to fall somewhat in real terms, the portfolio
always shrinks faster since it is a monetary asset, the very thing that inflation
most devalues.
Second, borrowers also face increasing materials costs. That means that they
will need larger loans (denominated in local currency) to purchase the same raw
materials. If credit portfolios don't increase their size (in local currency), credit
programs will be forced either to reduce their participant load in order to increase
loan sizes to remaining participants, or serve the same participants with less
effective loans.
Any inflation is bad for credit programs. Unfortunately, most credit managers
ignore the effects of inflation on their portfolios and prefer to mobilize fresh
resources from outside the program to maintain themselves and expand. This
phenomenon is especially apparent now that so much funding is available for
these types of programs. This s~trategy is self-defeating. Consequently, managers
must run hard just to stay in place, hardly a recipe for success.
Financial self-sufficiency me~lsures the ability of programs to both cover their

direct operating and financial costs and maintain the real value of their credit
portfolio. To calculate financial self-sufficiency, the program must include, as a
cost, the amount necessary in local currency to replace the value lost due to
the prior year's inflation (Formula 2).
Financial Analysis of Program Performance
Formula 2: 39
Financial self-Sufficiency
Opersllng Income
O".rsllona/expsnsss + (Palrlmony x Annuallnfl.tlon r.'.)
The following is a comparison of calculations for operational and financial

self-sufficiency in an economy where inflation is running at 50 percent, interest
rates are 30 percent and the current loan portfolio, consisting entirely of donated
funds, is 300,000 pesos.
Table I
SELF-SUFFICIENCY CALCULATIONS
SELF-SUFFICIENCY
OpIr8tlonl' Fln.nell'
PlIOI FleIO.
Income 7,500 7,500
1) Operb"l1g expenses
2) Financial expenses 5,400 5,400
3) Inflation's cost 10,500
Net Income 2,100 (-8,400)
The program that is operationally self-sufficient charging 30 percent annual

interest would have to charge 63.6 percent a year and capitalize more than half
of the interest generated in order to be financially self-sufficient. That would be
a positive real rate of interest of almost 24 percent on an annual basis.
Negative real rates of interest have a devastating impact on the value of loan
portfolios in a relatively short period of time, as we can see from the table below.
Although it may seem preposterous that someone could charge a negative rate
of interest of 60 percent a year, throughout 1988 and 1989 the government of
Alan Garcia in Peru maintained effective interest-rate restrictions in a highly
inflationary economy that resulted in lenders being forced to charge a negative
40 real rate of almost 80 percent. Bolivia went through a similar experience in

1983-1985. Currently, many countries have negative real rates of interest of
between 15 and 30 percent.
Tablen
NEGATIVE INTEREST
Negative ....1 rate Percentlge 10.. glue portfolio
(.nnull) 2y.r. 3y. . . 5 y••r.
50/0 9.75 14.26 22.62

10% 19.00 27.10 40.95
15% 27.75 38.59 55.63
20% 38.00 48.80 67.23
30% 51.00 85.70 83.19
40% 64.00 78.40 92.22
50% 75.00 87.50 96.88
600/0 84.00 93.60 98.98
It is important for managers in countries that do not have significant rates of

interest to maintain the value of their portfolios. For instance, in Costa Rica,
where inflation is only somewhere between 12 and 15 percent a year, the program
could still lose up to 55 percent of the value of its portfolio in only five years,
without even noticing it.
Self-sufficiency is just another way of talking about profitability for non-profit

institutions. Classic profitability ratios can and should be used when we analyze
program financial performance. The Return on Equity (ROE) (Formula 3) indicates
whether or not the program is capitalizing its patrimony (equity). Although, strictly
speaking, non-profit institutions do not possess equity, they do have a patrimony
of resources that constitutes one with which they carry out their activities. If the
ROE is less than the inflation rate then the program is decapitalizing.
Formula 3:
.Return ·on eqUity
Op!l!tlntl'nco",.-Ope18"", ex"."...
Patrimony
The Return on Assets (ROA) is another classic profitability indicator for financial 41
institutions (Formula 4). This indicator is more relevant for institutions with large
liabilities structures including long-term concessionary loans from such institutions
as the lOB.
Formula 4:
Return on Assets
Operating Income - Operating expenses
Total assets
The H'1turn (In Earning (Productive) Assets (ROPA) reflects the productivity of
the ins~hJti'-"i I ~-; asset structure, particularly when compared to its ROA. The
ROP!I, ,-- 'mula 5) should be close in value to the effective rate of interest
chargel ",', -,..~I"S, unless that institution has a large quantity of unproductive
asset,L',~~. ,-):' ;. nrnobilized bank accounts.
,--- Formula 5:
Return on Earning (Productive) Assets

Operstlnll'ncome - Operating expensss
Liquid assets1
=
1. note: liqUid ...... c.lh, bIInkl, l08nl outst.ndlng,lCCOunts recelv.ble, liqUid
Inve.tmentl.
Financial management of financial institutions can be extremely complex.

Fortunately for micro-credit program operators, NGOs are not true financial
intermediaries, since they cannot directly mobilize savings deposits from the
public. They are essentially one-way lenders. This simplifies the job of NGO
managers enormously since they do not have to worry about the major financial
issues of maturities matching, reserve requirement, investment analysis, tax
management, or government regulations.
The remainder of this chapter examines four of the five risk areas financial
institutions face (credit, investment, liquidity, and operating risks) and provides
42 NGO managers with simple tools to track program performance and control
exposure to potential losses. Fraud risk, the one area not explicitly dealt with in
this chapter, would be an appropriate area for a chapter on internal controls,
which mayor may not be in the domain of financial managers, depending on
the specific institutional structure. We should note that the comments in this
chapter relate to the financial aspects of the risk analysis and not to methodological
aspects, which may increase risk factors.
Normally, texts on financial management are filled with financial ratios and statistical
techniques. Ratio analysis, although apparently impressive, is of very little use unless
we are looking for specific problems and have good data from other similar institutions
with which to compare our performance. We will attempt to provide some general
parameters for the types of ratios that may be most useful to credit-program operators
and the general values these ratios should have. However, programs will differ
considerably and great caution and good sense should be used when we apply
ratio analysis to specific instiMions in specific contexts.
III.A CREDIT RISK
III.A.1 Delinquency and defaults

Credit risks refer to losses arising from the deterioration in the quality of the
NGO's principal earning asset, its loan portfolio. The issue here is whether
borrowers are both willing and able to repay their loans. Late payments
(delinquency) increase collections costs and decrease operating spreads. Outright
default (non-payment) is an expense that must be covered by the operating
spread, a very heavy burden indeed if the default rate is more than four or five
percent of the current portfolio. More importantly, high delinquency and default
rates cause credit programs to lose credibility among borrowers and generally
lead to ever-increasing repayment problems and threaten long-term institutional
viability.
There is no absolute relationship between delinquency and default. This

relationship depends on the credit methodology employed. For instance, in
solidarity-group programs loan delinquency turns into loan default very quickly
and very directly. DeHnquency means that the group is having internal difficulties,
and if the program does not intervene quickly to assist the group in working
these out, delinquency turns into outright default. Group loans that have been
defaulted are difficult to recover. Therefore solidarity group credit methodologies
should not have delinquency rates (overdue payments as percentage of current 43

portfolio) exceeding five percent. Delinquency rates between five and ten percent
indicate to managers that corrective measures must be undertaken immediately.
Delinquency rates of over ten percent usually indicate that a major overhaul of
the program is necessary.
In individual loan programs, given that loans are usually backed by collateral
guarantees, delinquency does not lead as directly to default. Typically, delinquency
levels will fluctuate between five and fifteen percent in individual loan programs
while default may be only one to three percent of current portfolios. Delinquency
levels in individual loan programs that exceed te~ percent but are less than 20
percent should be monitored carefully by managers to detect negative trends
and their causes. Delinquency levels exceeding 20 percent should be cause for
major alarm and program restructuring.
Delinquency levels vary according to country context. In Costa Rica, for

example, late repayment of all obligations is standard practice. In the formal
banking system, arrears run as high as 50 percent of current portfolios. In this
environment, a stable delinquency rate of 25 percent may not represent a
significant problem (except for cash flow). In other countries, credit methodologies
are supported by favorable legal and regulatory environments that allow for swift
legal action designed to impose sanctions, and delinquency can be kept to a
minimum.
Far more important than absolute levels of delinquency are tendencies.

Increasing levels of delinquency should always be investigated, no matter what
the absolute level. These tendencies always indicate changing conditions that
should be managed by program staff.
III.A.2 Causes for default

Lenders cause most borrower default in credit programs in developing countries.
Borrowers respond to repayment incentive structures established by lenders.
They respond as rational, optimizing economic actors, and not, as many people
think, out of ignorance or irresponsibility. We can best see this when we examine
the differing portfolio performances of similar types of lenders who operate in
similar markets.
Most analysts who have looked at the causes of default in credit programs
have limited their coverage to a single lender. As a result, they usually overstate
Financial Managem6nt of Micro-Credit Programs
44 the importance of external forces (natural disasters, structural deficiencies in

economies of developing countries) or cultural idiosyncracies (ignorance,
immorality, irresponsibility) on repayment performance. Once lenders realize the
importance that repayment incentives structures have on borrowers' decisions,
default becomes a manageable problem and not an inevitable consequence of
targeted development credit.
Lenders cause borrower default in many ways. Most commonly, 19nders are
not willing to collect loans from poor borrowers if they default. Politically, they
feel that such sanctions would be counterproductive or impossible to impose. If
borrowers know that they will not be 'punished' for defaulting, they have no real
incentive, in most credit programs, to repay.
Often, lenders feel that they cannot impose sanctions because credit is linked
to a broader development initiative involving technology transfer. Many times
these transfer schemes fail, and the borrowers are left in debt, through no direct
fault of their own. Unfortunately, most of these failed programs were poorly
conceived and executed and therefore, the basic fault lies with the lenders and
not the borrowers.
On other occasions, lenders attempt to use credit to provoke structural change

where other means would be more appropriate. This is a common failure among
micro-enterprise programs that target the most poor segments of society. Many
of these 'micro-business persons' aren't entrepreneurs at all but rather are
occasional economic actors. We cannot lend to people who are too marginal or
unstable and expect them to repay. We should examine other types of programs
for these 'too-poor' sectors, such as direct employment generation through work
programs or charity.
When credit programs restrict credit they communicate borrowers that the
likelihood of receiving a second loan is less than receiving the first loan. This
situation provides a disincentive for repayment of the first loan, particularly in
the absence of serious sanctions.
When NGOs subsidize credit they provide incentives to borrowers to misallocate

credit into non-prOductive activities, since the cost of that credit is so low. This
is particularly common when creciit is tied to technology transfer and borrowers
are skeptical about potential returns to new technologies.
Finally, incompetent credit administration by lenders contributes to borrower 45

lethargy in repayment. If a lender does not pursue delinquent borrowers
aggressively because the lender doesn't even know they are delinquent, the
lender can not expect to be repaid promptly. This problem is common to
understaffed NGOs.
Implementation of effective credit methodologies will reduce and even eliminate

these lender-generated incentives for borrower default. Thus the only remaining
default will be the truly difficult cases, relating to fortuitous events, or business
failure. ACCION-affiliated programs have demonstrated that these causes of
default amount to no more than three percent of the value of loan portfolios in
any given year. This value is double that of a good commercial bank, but well
within an acceptable range for a development activity aspiring to financial
self-sufficiency.
There are three basic analyses credit and financial managers should do to
control the loan portfolio quality. These should be done at least once a month,
if not weekly, and include: 1) late payments, 2) exposed portfolio, and 3) recovery
rate analysis.
A late-payments analysis measures overdue payments as percentage of current

portfolio (Formula 6) and is the common delinquency rate most institutions cite
in their financial statements. The reason for this is that of all the possible
delinquency measures, this is the one with the lowest absolute rates. This index
is dangerous for financial managers because it masks loan recovery problems
until they reach levels difficult to control.
Formula 6:
Delinquency rete
Amount overdue payment Number overdue payments

Current portfolio Number outstanding loans
If institutions increase either their. current portfolio size or their loan terms
simultaneously as more and more borrowers stop paying, delinquency rates may
actually fall. In order to detect these phenomena we should use two other
indicatol'S of repayment rates.
46 Exposed portfolio analysis, which measures the total outstanding balance of

loans with overdue payments as a percentage of current portfolio, corrects for
the distortions that arise from lengthening loan terms by considering the entire
loan to be risky once a single payment is overdue (Formula 7).
Formula 7:
Exposed Portfolio Rale
Outstanding bIIlance of BllloBns with one or more overdue payments

Current potfollo
Both delinquency and exposed portfolio rates should be analyzed by

disaggregating the overdue payments by the length of the delay. Payments that
are a day or two late are not as risky as payments that are two months overdue.
This analysis is the basis of any program's response to tardiness in repayment.
The percentage of payments actually received during the last thirty days as a
percentage of payments due during that same period (Formula 8) is the most
sensitive measure of repayment performance and should be rigorously employed
as a first warning signal that delinquency rates will increase. This Repayment
Rate is undoubtedly the best measure financial managers have of future portfolio
quality.
Formula 8:
Repayment Rate
Pay",.nt. received 'Bst 30 day.
PBy",.nts expected 'ast 30 ·dBys
We measure overall portfolio quality by comparing the loan losses with the
current portfolio on an annual basis (Formula 9). This measure is very difficu~
to employ when institutions increase their loan portfolios substantially, because
of the delay in declaring loans as unrecoverable due to the length of the judicial
process. Financial managers who wish to calculate their rate of loan loss accurately
must apply the loan losses to the portfolio from which those losses arose. For
instance, if the process of declaring a loan as lost takes a year on average, then 47
the loan loss amount should be applied to the prior year's portfolio.
Formula 9:
Portfolio Quality Indicator (Loan Loss Rate)
Amount of loan losses

Current (relevant) portfolio
111.8 INVESTMENT RISK

Investment risk is also known as interest-rate or maturity risk. This is the
potential loss which results from a maturity· mismatched balance sheet: financing
low-return long-term assets (subsidized loans) with expensive short-term liabilities
(commercial bank financing of program portfolio). This type of risk is perhaps
the primary risk most true financial intermediaries face. Most NGOs are not true
financial intermediaries, and to the extent that they mobilize donated or highly
subsidized resources to fund their portfolios, they minimize this risk. However,
if NGOs are committed to maintaining the value of their portfolios they must
assign a cost of funds equivalent to the inflation rate to this 'cheap' money and
consequently face some investment risk. In highly inflationary economies, this
risk can be very great indeed.
11I.8.1 Spreads
The key financial indicator related to investment risk is the 'spread' between
the institution's cost of funds and revenue generated by its primary earning
assets, or its loan portfolio (Formula 10). All financial institutions can project an
equilibrium point spread, given a certain projected loan portfolio and related
Formula 10:
Simple 'Historical' Spread
O/Ml8tlntllncome -Cost of funds

Cur,.nt portfolio
48 operating expenses. The larger the loan portfolio, the smaller the spread, since
the fixed institutional co~ts, such as rent, are spread over a greater variable
operating cost, lowering the average cost per dollar lent.
As a general rule, operating spreads for micro-business programs are higher

than for formal sector lenders, given the tiny average loan size for most programs.
Most programs with over 300,000 dollars in loans on the street should be able
to work with a spread of between 18 and 30 percent a year. Programs with over
a million dollars in loans should be able to work within a spread of 12 to 24
percent a year. Unless micro-credit programs form part of a larger institution that
also does other programs, it will be difficult for them to reach self-sufficiency with
less than 300,000 dollars in !oans on the street.
The Simple 'Historic' Spread presented in Formula 10 measures the resultant

spread from a prior period's activities, whether that period be one day or one
year. It is too simplistic to be of much analytical use. A far more powerful measure,
which is also conceptually more complete, is Formula 11, which compares the
weighted interest rate for each of the loans in the portfolio with the weighted
cost of funds used to finance that portfolio. This method is far superior when
institutions have more than one source of funds or more than one interest rate
for loans in the portfolio.
Formula 11:
Spread
Outstanding Balance Each Loan x Its Interost Rate

Current Portfolio
Less
Amount Each Source Funds x lis Cost
Current Portfolio
To calculate the weighted interest rate charged to the institution on its loans
the financial manager must divide the outstanding balance of each loan by the
current portfolio to find the weight that loan carries within the entire portfolio.
Then the manager must multiply that result by the interest rate for that particular
loan. Finally, the manager must add together all of these results to discover the
weighted interest rate charged.
Fin6!ncial Analysis of Program Performance
If delinquency is significant, this must be accounted for by reducing the weighted 49

rate by the delinquency rate. For example, if the weighted interest rate is 3.5
percent a month and the delinquency rate is 15 percent. then the spread for that
month should be readjusted downwards to 2.975 percent. Even though NGOs
will probably recover some delinquent interest income from previous months, it
is important to readjust downwards to account for the increased collections costs
for delinquent loans, costs which are seldom factored into financial projections.
To calculate the avera~~' cost of funds, financial managers should proceed

similarly. First, they should calculate the weight each source of funds carries
within the general portfolio by dividing the outstanding balance of each sources
of funds by the current portfolio. Then they should multiply this result by the cost
of each oi these sources of funds and finally, add all of these results together.
RememLvr that the cost of funds is the effective rate of interest institutions
pay for commercial loans or the inflation rate for donated or concessionary loans.
If institutions operate in economies where interest rates for time deposits ~re
positive in real terms, then they should use the opportunity cost of money instead
of the inflation rate al:; the cost of funds for donated or concessionary funds. The
opportunity cost of money is the interest rate that those funds would earn if they
were invested in low-risk time deposits.
In some countries and programs this data will change only very slowly since
interest rates charged will be the same for all loans, and seldom change, and
the inflation rates will be relatively stable. In other cases, such as that of Chile,
the spread changes daily, since interest rates on loans the program receives
from private banks change daily and the interest rate PROPESA charges on its
loans to program participants is readjusted monthly. The table below tracks
PROPESA's operating ~pread over a typical period.
Table III
PROPESA OPERATING SPREAD
MONTH W.lghted W.lghted Spreid
In....." Alt. Coat of Fund.
March 3.580 1.650 1.930
April 3.719 2.800 0.919
May 3.706 2.390 1.316
.June 3.869 3.137 0.732
JUly 3.972 3.222 0.750
Averagt 3.769 2.870 0.899
50 111.8.2 Spreads and selfasufflclency

As managers track the spread they are receiving they will be able to monitor
their progress toward the all-important institutional goal of financial self-sufficiency.
All financial projections for credit institutions are extremely sensitive to small
variations in the spread. In the case of Chile, the break-even financial projections
require a spread of 1.25 percent a month, considerably above the 0.9 percent
for the five months presented above. In this case the financial manager knows
that unless tIe adjusts either the interest rates he charges or his cost of funds,
the program will not reach self-sufficiency as planned. In this particular case,
rising inflation rates pushed up interest rates, squeezing the spread. If inflation
rates were to fall, then the spread would open up and exceed the 1.25 average
needed to reach self-sufficiency.
•
Monitoring spreads allow managers to manage the funding mix of their loan
portfolio, and readjust the interest rates they charge to program participants more
appropriately during times of economic instability or fluctuating inflation or interest
rates. If a program's cost of funds varies significantly from week to week, then
that program should also vary the interest it charges on loans on a weekly basis.
Otherwise it will fall into the fatal liquidity mismatch trap, which is what ruins
most financial intermediaries.
IIl.e LIQUIDITY RISK

liqUidity risk is the potential loss that results from the acquisition of expensive
short-term funds to cover unexpected credit demand where the cost of funds
exceeds the normal average cost of funds and squeezes the 'spread.' Although
this type of risk is ultimately refle(:1ed in the 'spread' institutions receive, it is very
different from investment risk. Uquidity risk measures the potential losses from
miscalculating expected credit demand and not having sufficient resources on
hand to cover that demand.
True financial intermediaries cover this unexpected credit demand by borrowing

short-term funds, which are very expensive compared to their normal cost of
funds. NGOs seldom do this, but instead restrict credit. They restrict credit either
because they don't have access to short-term bank loans, or because they
consider these Ic~.ns to be too costly.
This reasoning is flawed. When NGOs restrict credit through disbursement

delays, turning down loan applications, or increasing requirements to obtain
a l')an, they decrease the quality of their service. Program participants 51

have less incentive to repay their loans if they feel that they will not get
a new loan in the future, in spite of having fulfilled their part of the bargain.
Delinquency levels in micro-credit programs, and development lending
institutions in general, is very closely linked to credit restriction. Ultimately,
this response to excess credit demand is far more 'costly' than the financial
cost of short-term borrowing.
One way to reduce excess credit demand (which is not seasonally related)
is to not underprice credit. When institutions charge subsidized interest rates
they create excess demand for loans. Commercial interest rates regulate
credit demand and offer increased income to institutions that are seeking
financial self-sufficiency.
Should funds be insufficient, programs should resort to short-term bank

financing to prevent credit restriction. Should institutions perceive th~+ no
additional funds will be available to expand the portfolio in the long term and
the net change is not strictly due to seasonal fluctuations in product demand,
it should consider rationing credit through the interest rates it charges and
not through forced credit restriction and service quality deterioration.
Managers must monitor credit demand closely, particularly when average

loan terms are as short as they are in micro-credit programs (2-6 months).
Seasonality and methodological commitment to increasing loan amounts to
successful borrowers gradually create potential liqUidity crises if not well
managed. The Liquidity Management Worksheet on the following page details
the calculations necessary for financial managers to monitor future liquidity
positions.
III.C.1 Projecting credit demand

The key to projecting credit demand is to monitor carefully both loan due
dates and seasonal product demand for the types of businesses programs
finance. The computerized report on loan due dates allows managers to know
which loans will probably be renewed during a specific period. In most cases,
credit methodologies will dictate the maximum permitted loan increases to
individual clients (30 percent increase in installment payment amount). This
can be used as a maximum estimated demand on the part of current clients
and should be adjusted either up or down depending on the intervening
seasonal factors.
52
LIQUIDITY MANAGEMENT WORKSHEET
Amount of 108n. due In month $,----

(Initial amount lent)
~: drop-out rat. (100k)
Amount loans of current
participants to be renewed
Multiply by: average loan Incr.ase (1300A.)
(adjusted for seasonal factors)
Probable amount of loan renewals
Add: total dlsbursementa to new Plrtlclpantl
Expected total credit demand for month
....: Expected loen ·recov.ry In month
(total instal/ment payments due in month
corrscted for delinquency rates)
Net expected change in loan portfolio
L_: liquid _ t s cu....nUy
on hand or readily· IVlliable
(bank accounts, time deposits, donations,
unused credit lines)
Expected liquidity surplus
(shortfall)
In cases where credit methodologies are not specific about average loan
amount increases, the financial manager can use a simple regression analysis
to find the relationship between the number of a consecutive loan and its average
size, or its average increase. For example, one determines the following on the
basis of a statistical analysis:
TeblelV 53
AVERAGE LOAN SIZE
Number of Loan Average Lan Size
First loans $ 30,000

Seoond loans 50,000
Third loans 75,000
Fourth loans 100,000
Fifth loans 130,000
Sixth loans 160,000
Seventh Ioana 175,000
Eighth loans 200,000
By performing a simple linear regression one determines a B value of XXXXXX.

Therefore, for any given X value one can determine the related y value with a
high degree of certainty, if one's correlation coefficient is high. Finally, to calculate
the average loan size for the coming month one must first estimate the average
number of consecutive loans in the coming month's disbursements on the basis
of the historical average. This is the estimated X value from which one can
estimate the projected average loan size (y value).
To the total disbursements for renewed loans the manager should add the
total expected disbursements to new program participants, usually relatively
simple because credit methodologies usually require a two-to-four week induction
period for new participants before they receive their credit. This, plus the expected
credit demand on the part of current participants, is the total expected credit
demand.
III.C.2 Pr~!ectlng need for new funds

In order to determine the need for new funds, one should subtract from the
expected credit demand the expected loan recovery for the same period. This
result is the expected net increase (decrease) in the loan portfolio. This expected
net change in the current portfolio should be compared to the funds available
either from additional funding sources or other liqUid assets (bank balances, time
deposits) to determine liquidity availability. Formulas 12 and 13 are two quick
liquidity measures that may be useful in given circumstances. The Liquid Reserves
Ratio (Formula 12) indicates the proportion of the institution's eaming assets
that are available on short notice to meet credit demand. The Liquidity Adequacy
Ratio (Formula 13) measures liquid assets as a proportion of the prior month's
54 total credit demand. Both ratios are most useful when used in a historical context
when there has been a continuity of portfolio behavior.
Formul812:
Liquid H• ...".. Ratio

cahonhand
Liquid assets
Formul813
Liquidity Adequacy.Ratio
CMhonhand
III.D OPERATING RISK

Operating risk refers to the potential losses associated with NGO micro-credit
program operations. Errors, inefficiencies, and other unexpected and
unaccounted-for occurrences can increase program costs and reduce
self-sufficiency. Essentially, operating risk can be measured by efficiency
indicators that focus on specific services NGOs offer as part of their micro-credit
program.
For example, the traditional efficiency indicator for lending operations is the
Cost per Dollar Lent (Formula 14). Accion programs typically spend five pesos
for each 100 pesos they spend. This indicator is most useful for tracking the
evolution of a specific program, comparing its performance with prior months. It
is relatively less useful for comparing different types of programs, due to its
extreme sensitivity to average loan term differences. Programs whose credit
methodology calls for high turnover of individual loans with average terms of two
months will naturally have a much lower cost of lending than a program whose
average loan term is a year.
Formula 14: 55
Cost per Dollar Lent

Operating exptlnca
Total/lMns dlsbuIWd
III.D.1 "ools for measuring administration efficiency

A less sensitive measure of administrative efficiency is the ratio between
operating expenses and the current portfolio (Formula 15). In order to reach
self-sufficiency, the institution must reach a ratio that is below the effective interest
rate it charges on loans. For that reason this ratio is much more useful than the
Cost per Dollar Lent. The Cost per Dollar Lent may increase due to methodological
changes while at the same time the institution may actually improve its
self-sufficiency ratio.
Formula 15:
Operating Efficiency
Operallng expenses
Cur,.ntportfollo
Tracking of both fixed and variable costs can be a useful tool for making
necessary adjustments to reach self-sufficiency. These costs should be compared
to total loan disbursements (Formula 16), current portfolio (Formula 17), and
total operating costs (Formula 18).
Formula 16:
Halloof Varlebl.Co.IIIO
Totll. Loan Dllbu....mentj
Fixed.",,,.,. eoats .
. .•. .lota/IIMn.dlsbursed
Financial Afanagsmsnt of Micro-Crsdit Programs
56 Formule17:
Ratio of Variable Costs to

Current Portfolio
Fixed orvarlabl.
Currentportlollo
co.,.
Formula 18:
Ratio of Variable Costs to

Total Operating Costs
Varlabl. co.,.
Tot.optll8t1ng ex",'n...
Although general financiai ratios may be useful for financial monitoring, one
will find that this type of analysis is not particularly useful for attacking problems
in cost structures. Much more relevant, particularly for deciding the course of
future action, is break-even point analysis for individual services. When one
calculates service break-even points one can monitor the contribution of each
to overall self-sufficiency goals.
III.D.2 Loan size

The key service in any micro-credit program is credit. Consequently, the financial
manager should calculate estimated average and minimum loan sizes necessary
in order to reach break-even point for the credit activity.
The absolute minimum loan size institutions should offer is that which covers
the direct costs paid to third parties involved in making the loan. Programs
should not make loans where the interest and fees income does not cover
the cost of funds, fees paid for notaries, taxes, and other legal services, and
any other fees paid to third parties as part of the loan process (information
on debtors, bank collections fees, etc.). Even if programs expect loan amounts
to increase over time, they should not incur expenses to third parties in order
to give out a loan.
Fin~!1cial Analysis of Program Performance
One can calculate the absolute minimum 10..l n size in the following manner: 57
MINIMUM LOAN SIZE WORKSHEET I
1)Determine minimum loan term and payment schedule
(3 months, monthly payments)
2)Determine fixed costs to third parties for minimum loan term and payment
schedule:
Bank collection fees
($1 per payment received) $ 3.00
Legal fees 5.00
Notary fees 2.50
Tax 0.50
Debtor information fees 1.70
Total third-party fees $12.20
3)lf these third-party fixed costs can all be covered up front, as fees, and
Institutions are charging rates of interest that cover their cost of.funds, then· there
is no absolute minimum loan size applicable to the program· according to these
criteria. If both of these conditions are not met then programs will have to calculate
total income and total expense generated by this minimum loan size.
4)ln cases where institutions charge interest rates that exceed their cost of
funds but do not cover third-party costs through up-front fees they must
calculate the minimum loan size required to cover the deficit, based on the
expected spread between .interest earned and the cost of·.funds.
For example:
Expected spread (% monthly) 2.5%
Total third-party costs $12.20
Calculation: Need $175 loan for three monthstogenerate $12.20 of
interest revenue.
58 5)ln the case where institutions charge interest rates that donolcover
their cost of funds but charge up-frontf8es and commissions, they. must
calculate.the deficit generated· by the. negative spread and· add this.to t:1e
third-party costs to determine the amountofthe .fees they should charge.
If the up-front fees are calcul8ted as apercentage oftheJoan amount,.thcm
the calculation is similar to the prior exampleiexceptthat h1steadof using .
.• the interest rate, managers should substitute an effeetiverateofinterest,
which excludes fixed fees, astheb8sisfor their calculations.
. . . .. . . . . .
Although institutions should never give a loan that is below the absolute
minimum amount established above, this amount is too low to be a general
guide. A more useful minimum would be the minimum loan size required to cover
the direct costs incurred in making and following through on that loan without
considering administrative overhead, as in the following example:
DIRECT COSTS OF LOAN
1)Thlrd-party C08t8 for minimum lOin term and•• payment schedule:

Bank collection fees
($1 per payment received) $~.oo
Legal fees 5.00
Notary fees 2.50
Tax 0.50
Debtor information fees 1.70
Total third party fees • .• $12.20
2)"'1.,1.. co.ta:
Paper, printed fonns $2.50·.•
Transportation (4 trips) 3.00·
Total material costs
3)Per80n.,.1 cost.:
Credit agent (4 hrJurs) $15.00 .
Credit assistant (1 hour) 2.00····
Total personnel.,oosts $17.00.···········
Toblldlrect co.ts $34~70,·
For a 2.5 percent monthly spread over the course of a three-month minimum loan, 59
the minimum loan size would have to be $680 to cover the direct costs of $34.70.
The other very useful parameter is the break-even loan size. On average,
programs must place loans of a break-even size in order to meet their
self-sufficiency goals. All loans larger than the break-even loan size actually
report a 'profit' to the institution and compensate for loans that are smaller than
the break-even loan size.
In order to calculate the break-even loan size, managers must add the general
administrative overhead to the direct loan costs. The result is the total cost of
making the loan. Normally the overhead is calculated based on the fixed costs
associated with a certain volume of operations, given the scale of the program.
For example, a program that plans on reaching 3,000 participants with a current
portfolio of 500,000 dollars will ",~ed a certain infrastructure:
Rent (150 m2) Vehicle

Director PUblicity
Accounting staff Legal and audit fees
Insurance Equipment maintenance
This infrastructure is relatively stable through long periods of program growth,

unlike the direct (variable) costs of granting a loan. These fixed costs can be
spread over the break-even number of loans, calculated as a percentage of the
estimated break-even portfolio and added to the costs of funds for the minimum
loan size calculations presented above.
In the example mentioned above, the fixed costs amount to $8.26 per loan,
at the self-sufficiency point, making a break-even cost per loan of $43 and a
break-even average loan size of $850.
As loan terms increase, break-even loan sizes decrease, unless there is a

fixed monthly supervision cost imposed by the credit methodology. Institutions
should calculate minimum loan sizes for different loan terms and have them
60 presented in a table format as shown below as a guide for the credit approval
process.
Table V
MINIMUN LOAN SIZES

IInlmum Lc.an Slu. NIcInIry
(In plIO.)
LoIIn.T....
Guideline. I mot. 12 mo•• 24 mol.
Abtolute minimum 417,508 50,542 51.320
R.commended •minimum 171,935 118,727 U.922
Break-even minimum 3043,870 233,454f 169.8404
In essence, tf dissecting service costs, fh1ancial managers can pinpoint

strategies to meet program impact goals while maintaining the overall institutional
goal of self-sufficiency and long-term sustainability. Only by being conscious of
individual service break-even points can managers prioritize among services in
order to cover institutional costs.
Photograph: Sonovlso d8! P8ro
IV SETTING INTEREST
RATES AND OTHER FEES
STRUCTURES
To anyone but the most experienced financial analysts or bankers, interest
rates can become vei'J confusing very quickly. Most daily newspapers throughout
Latin America publish five to ten different interest rates that determine the day's
financial market tendencies. Articles about macroeconomics refer constantly to
'real' rates of interest, as though the interest we all pay on our bank loans weren't
real at all. In countries with indexed financial markets we see interest rates
applied not to monetary units but rather to alternative measures of value like the
'unidades de fomento' in Chile.
Establishing interest rates for micro-enterprise lending is a relatively simple

affair. It does not require sophisticated liquidity matching, reserve requirements
balancing acts, overnight or over-weekend investments around the globe to
preserve 24-hour productiVity on investments, or even high-level risk analysis.
It requires knowledge of a few simple financial concepts and dedication to their
effoctive and efficient implementation.
The first section of this chapter discusses basic types of interest rates and
their methods of calculation. All micro-enterprise credit program operators should
be familiar with these concep!s. The second section of this chapter discusses
interest-rate policy: what micro-credit programs should charge for their services.
The final section details the constraints most NGOs face when they determine
their interest-rate policies.
Pre~ous Page 11au

64 IY.A TYPES AND METHODS OF INTEREST-RATE

C~LCULATIONS
IV.A.1 Nominal rate. of 'nterGst

Simply put, r.ominal rates of interest are the rates the lender says one will
pay. They are the absolute numbers used in the interest rate calculations. When
a bank offers an overdraft privilege and charges 1.8% a month, that is a nominal
rate of interest. The nominal rate is the statQd rate one pays.
Nominal rates of interest are calculated in two principal manners. The first is
a flat rate of interest, or the nominal interest rate multiplied by the number of
months one has the loan. The second, and the onl,' truly legal method in most
countries, is to calculate the rate of interest on the average outstanding balance
of the loan over the period the borrower uses the loan.
IV.A. 1.a Flat intorest rate
To calculate the amount of interest a borrower would pay on a loan using the
flat interest rate fotmula one multiplies the loan amount by the interest rate
applicable to the loan term established. For example, the borrower would pay
$60 interest on a $1,000 loan for 3 months.
Loan amount $1,000.00

Monthly interest rate 20/0
Loan term 3 mos.
Total interest paid S 60.00
In ordar to calculate the amount of the payment to be paid one must use the
following formula:
+Tot."n'.,..,
NumIM, 01 pa,,,,.,,'.
PaYmlHJt=p"nCIIMI
In the case of flat interest rates, it makes no difference what the amortization
schedule of the loan is. The total interest paid does not vary. Therefore, in this
case the borrower would pay the same $60 whether he/she had use of the whole
$1,000 during the entire three months or whether he/she repaid the loan in three
Setting Interest Rates and Other Fees Structures
equal monthly installments. In the latter case he/sho had, on average during the 65
three months, only $667 available.
IV.A. 1.b Interest on average outstanding balances
It is precisely to remedy this inequity that standard banking practice is to
calculate interest on the average outstanding balance. This means that the
borrower pays interest on the principal loan amount over the period he/she
actually utilizes it. As the borrower repays the loan, the interest is calculated on
the diminished principal amount of the loan as shown below:
Table I
INTEREST ON OUTSTANDING LOAN BALANCE
Loan amount $1,000.00
Monthly interest rate 20/0
Loan term 3 mos.
P8yment Tobll Prlnclpel Int".,t Bllian..

1 $346.75 $326.75 $20.00 $673.25
2 346.75 333.30 13.45 339.95
3 346.75 339.95 6.80 0.00
Total 1,040.25 1,000.00 40.25
From the table presented above, we see that the borrower pays only $40.25 in
total interest when one calculates the interest rate on outstanding average balances,
rather than the $60 he/she would have paid according to a flat rate calculation.
1jl summary, depending on the method of calculation, the same nominal rate
of interest paid on two identical loans may result in very different total interest
payments. Ostensibly, both borrowers pay two percent a month for their loans,
yet one borrower pays 50 percent more for the loan than the other borrower.
Most financial managers prefer to buy financial calculators to determine the actual
payment amounts clients owe. Nevertheless, the formula for calculating the
amount of each installment is the following, where:
;. interest rate per installment period
n. number of installments
p. prinCipal amount of the loan
Installment PII,nwnt = Px 1 x ( 1+ I)
. (1 +/)-1
66 IV.A.2 Effective rate. of Int.,••t

Effective rates of interest allow one to put all loans on a common ground
and compare their relative costs. This allows one to shop around for
different loans with very different conditions and methods for calculating
interest rates and to compare them in terms of the interest rate actually
paid.
Effective interest rates vary according to the nominal interest rate

calculation method. Borrowers who pay two percent monthly on outstanding
balances effectively pay two percent a month. H\lwever, the borrowers
who are charged two percent monthly flat, effectively pay almost three
percent for the money they really use. This is because they are being
charged as if they had the use of the entire $1,000 during the entire three
months when in reality they paid three installments and on average had
only $667 available.
Effective interest rates also vary according to when during the course
of the loan borrowers pay their interest. For example, loan sharks typically
charge flat interest rates and make clients pay interest up front by
discounting the principal amount of lhe loan. In the case of a three-month
installment loan where the borrower pays two percent a month flat, but
pays up front, he/she effectively pays 3.11 percent a month whereas if
the interest were distributed in equal portions over each installment, he/she
would effectively pay 2.97 percent a month.
Effective interest rates express, in the form of an interest rate, the effects
on borrowers' credit costs due to commissions or other closing costs. For
example, most institutions charge loan-closing costs or commissions up
front, or before the borrower even takes the money home. These charges
are usually deducted from the principal loan amount. This means that
although the interest is calculated on the entire loan principal, the borrower
does not receive that entire principal amount and therefore effectively pays
more than the nominal rate.
In this case, the same b'orrower who pays two percent monthly on
outstanding balances for a three month installment loan but who in addition
has to pay a three percent up front commission, effectively pays 3.58%
monthly on the $970 he/she actually received. In this case the borrower
pays identical installments whether or not he/she pays the commission.
Sening Interest Rates and Other F38S Structures
Onlytheeffeetlvelnterestratechangesifcommisslonsareimposed;thenominal 67
rate and method of calculation remain untouched.
Finally, one may use effective interest rates to calculate the effect of
compensating balance requirements on the cost of credit to borrowers. Many
credit unions and some banks require that borrowers leave on deposit a certain
percentage of the principal lent.
Credit unions frequently require 25 percent of the value of the loan to be

left on deposit in share capital, which pays little or no interest, as a means
to capitalize the institution. This means, in essence, that the credit union
borrower is only receiving 75% of the value of his loan in 'fresh' money. If the
25% left on deposit paid no interest, a borrower who has a three-month loan,
whose interest is two percent monthly of outstanding balances, effectively pays
18 percent a month.
Banks frequently requirs guarantees in the form of CDs or other deposits

to cover short-term operations. These cases are similar to that of credit unions
in that borrowers must include in their cost calculations the net difference
between the revenues generated by those deposits on guarante, and the
interest they are charged by the bank for the loan. In some cases the effective
interest rate becomes practically infinite (100% guarantee on deposit - no
'fresh' money).
Effective interest rate calculations can be very complex and we highly

recommend that financial managers invest In a financial calculator in order
to do these types of analysis. The manner of proceeding varies according to
the type of interest rate and commissions structure we analyze. The following
table provides two examples of effective interest rate calculations using
financial calculators. The mathematical formulas for solving for intarest rates
are too complex to present here. Note: do not confuse effective interest rates
on loans with the effective (compounded) interest rate functions on many
calculators. There is no set procedure for calculating effective interest rates
for all cases.
68 Tablen
EFFECTIVE INTEREST RATES

EXImpie 1: Principal $100
Loan term, th.... months
Amortization, one payment
Interest, flat 2%
Up-front commlulon 5%
Taial Inter..t paid $6

Net principal received $95
Effective Inte....t rate 2.11%
MI.hod: Divide total interest by n.. prlncipal received
Eumple 2: Principal $100

Loan term, three months
Amortization, monthly
Inte...st, flat
Up-front commiulon
Tatal Inter.t paid $8

Net principal received $95
Effectlvelnter..t rate 5.680/.
MI.hod: Calculate total to be paid ($106) and divide by number oIpaymentt(3) for monthly
payment. Feed Into calculator the net pri~al rec:eived ($95). along whh number of paymente and
solve for interest rate.
Exllllple 3: Principal $1()()

Loan term, th...e months
Amortization, monthly
Int.....t, outstanding balance 2%
Up-front commlseion 5%
Total Internt paid

Net principal l'ICIivld
Effective Interest rate
Me.hod: Feed original principal· ($100), number 01 paymtntl. (3) and.lnte...strate (2%) Into calculator
and IOWO for payment.· Then Neall prlnclpal,tpply commit,lon,· .....nteradjultld principal ($85) and
IOlve for Int.,..t rate.
IV.A.3 Real ,at.. of Intere"

Real rates of interest are rates that take into consideration the effects of
inflation. Real interest rates are either nominal or effective rates of interest less
the inflation rate. For instance, if one charges effective rates of interest of 45
percent annually in an economy where inflation is 27 percent a year, one is
actually charging an 18 percent real effective rate of interest. If, however, one
.. ',"
Setting Interest Rates and Other F86S Structures
charges only 12 percent interest in that same economy, one is charging a negative 69
real rate of 15 percent annually.
One uses real rates of interest to account for the effects of inflation. If one
charges negative real rates of interest, one cannot maintain the purchasin" power
of our loan portfolio. It will be worth less in time, compared to loan portfolios
denominated in dollars or other major currencies. In fact, if one uses all of the
interest earned to cover one's operating expenses, the portfolio will lose value
at the same rate as inflation, in this case 27% annua.lly.
Real rates of interest, as effective rates of interest, are analytical tools for
managers. They are not normally explicit contractual interest rates. Gome
countries, however, have institutionalized real interest rates in contractual
agreements by indexing loans. In this case, loans are not denominated in a
specific currency but rather in a non-monetary unit which is pegged to inflation.
This non-monetary unit, such as the 'unidad de fomento' in Chile is a 'value unit'
pegged to the same market basket of goods and services that is used to measure
inflation. The 'unidad de fomento' is, in essence, a monetary unit reflection of
inflation. Interest rates for long-term loans are always expressed as UF plus the
nominal interest rate. This preserves the value of the national financial system
vis a vis the developed world's financial systems.
.J
IV.B RECOMMENDED TECHNICAL CRITERIA FOR SETTING

INTEREST RATES ON LOANS
From a purely technical perspective, setting interest rates is fairly
straightforward. However, political and legal considerations usually constrain
strictly technical criteria and have a negative impact on financial self-sufficiency
goals and long-term institutional viability. In this section we present the technical
criteria that should be employed whenever possible. Later in this chapter we
discuss common political and legal constraints and how they should be handled.
There are three basic components to the interest rate institutions charge for
loans: 1) cost of funds, 2) expected loan loss reserve, and 3) operating spread.
Each of these components is independent of the others and only the sum of the
three will ensure NGOs that their micro-credit program will achieve financial
self-sufficiency and long-term sustainability. NGOs that charge less than the
technically optimal interest rate will suffer consequences that are prejudicial to
long-term longevity of credit operations.
I • ,"
70 The proportional r&venue generated by each of these thr&8 components has its
own specific and essential end-use. Should institutions not apply the r&venue generated
appropriately, it makes little dfference what the basis for interest rate cala,lIation
ultimately is. The components and their end-use are presented in the table below:
Teblelll
INTEREST RATE COMPONENTS
Component End-....
Cost of funds Cover expUdt drect costs of r&sources used in loan portfolio,
cover the indirect cost of inflation by producing an annual
operating surplus, which when expressed as a percentage of
that portion of the current portfolio which corresponds to donated
or Iow-cost funds, is equal to the. annualized inflation rate.
Expected loan Covers the amount needed to r&place the loan loss reserve
which must be written off the books annually through the
prom-and-Ioss statement. This amount is expenseG monthly
through the creation of the loan loss reserve.
Spread The revenue necessary to cover operating expenses
IV.B.1 Cost of funds

The amount that financial institutions pay for the resources they lend should
be the primary basis for determining the interest they charge on loans. First and
foremost, institutions must cover their nominal cost of funds. Micro- enterprise
credit programs that borrow funds to on-lend must start by covering the direct
expenses associated with these resources. These resources may be local
currency loans orthey may be loans denominated in a foreign currency. Institutions
must not only consider the nominal cost of funds, i.e., interest rates paid to
depositors or paid on certificates of deposit, but also their effective cost of funds,
i.e., compensation for reserve requirements. Institutions that operate across
national boundaries must also consider their real cost of funds, I.e., interest rates
denominated in $U.S..
If institutions work with a significant portion of donated or heavily subsidized

resources within the composition of their credit portfolio, they should establish a
cost of funds that can maintain the approximate real value of these low- cost
resources. Otherwise, as inflation unfolds, self-sufficiency can only be reached
by new infusions of external resources. These resources replace the resources 71

that have already been inflated away.
This approach would not be necessary if the institution's costs did not rise at
the same rate as the general inflation within the economy. In most periods of
increasing inflation, salaries, which account for about 80 percent of the operating
costs of most micro-credit programs, fall in real terms. A portfolio, diminished by
inflation, could still be capable of generating income to pay these diminished
real salaries. However, once the inflationary process has been controlled, salaried
employees usually seek and obtain real salary increases and the diminished
portfolio would be unable to respond.
Unfortunately, non-profit institutions generally pay low-end salaries, even in

periods of relative economic stability. Under these circumstances, if an institution
allows rea' salaries to fall as fast as salaries in other sectors it will face extremely
high rates of turnover or employee discontent, both of which hurt productivity.
Another problem with inflation is that as inflation proceeds, borrowers face

rising inputs costs. They must have access to larger nominal loans in order to
purchase the same amount of raw materials. A shrinking portfolio forces lenders
to choose between eliminating clients to maintain average real loan size or
maintaining all their old clients and allowing real loan size to fall.
Except in the more volatile inflationary situations, institutions that work with
subsidized resources should charge a rate of interest greater than the inflation
rate and should reinvest that portion of the interest received which is equivalent
to the inflation rate back into the loan portfolio. This is known as maintaining the
real value of the portfolio. Institutions that charge substantially positive real rates
of interest but which don't maintain the value of their portfolios will ultimately
suffer a sustainability crisis.
IV.B.2 Expected loan loss reserve

Institutions must charge an interest rate sufficient to cover their expected loan
loss in addition to their cost of funds. Ultimately, defaulted loans that are not
recovered from debtors must be replaced by income generated from the loan
portfolio. Otherwise, the loan portfolio shrinks in size over time, in nominal terms.
As the portfolio shrinks, it is less able to generate the income necessary to cover
operating expenses.
'7,2 NGOs should establish a bad-debt reserve to covar expected loan losses. To
create this reserve, first estimate expected losses on a monthly basis, and then
expense these expected losses through the income statement. When a loan is
finally judged to be irrecoverable, it is actually written off. This means that the
accountant adjusts the balance sheet items by subtracting the real loss both
from the loan loss reserve and from the current assets.
All loans that have remained past due for longer than anA year should be
written off. This does not mean that the institution forgets about the loan. The
fact that it is written off the accounting books does not affect in the slightest the
institution's ability to collect from the debtor. This policy ensures that lending
institutions will maintain a relatively clean portfolio and not accumulate a significant
non-performing portfolio within its larger portfolio. If a written- off loan is collected,
it is accountEid for as unexpected income.
Normally, financial institutions estimate the amoun~ of expected bad debt they
expense to the loan loss reserve on the basis of prior experience. This amount
is usually expressed as a percentage of the current portfolio. Mature financial
institutions can usually predict with a high degree of accuracy the percentage
of the loans that will be defaulted and not recovered.
However, a new financial institution finds this estimate more difficult for two
reasons. When it lends to a 'new' client group, in this case micro-enterprises,
with no prior credit experience, the NGO cannot estimate with precision. Secondly,
when a current portfolio grows rapidly, a significant portion of its loans are new
loans, which have not yet had the opportunity to become delinquent. Therefore,
it is easy to underestimate the real ratio of bad debt to current portfolio. During
this growth phase, programs must track bad debt as a percentage of total
disbursements rather than current portfolios.
As a rule, well managed micro-enterprise credit programs shoul~ not have

loan losses exceeding three percent of the average current portfolio in any given
year. To establish the loan loss reserve, institutions should expense 0.25 percent
of the current portfolio at the end of each month and credit this to the loan loss
reserve. Institutions which do not have any provision for loan losses should open
the reserve with a one-time deduction of five percent of the current portfolio to
estab:ish the reserve, with the consequent reduction of total net worth.
This should be considered a minimum standard. Only if a program demonstrates

over the course of three to five years that it can operate with a smaller loan loss
reserve should it do so. If institutions find that this reserve is insufficient to cover 73
the bad debt losses, this reserve should be increased; ultimately such a decision
would be result in a higher interest rate for clients.
In an economy where inflation is running at 18 percent, a well managed

micro-enterprise credit program that works with donations will have to charge 21
percent interest just to maintain the real value of its current portfolio, taking into
account both inflation and the loan loss reserve. Up to this point, the institution
has not yet charged anything to cover its operating costs.
IV.B.3 Operating margin. 'spread'

All financial institutions operate on a spread. Micro-enterprise credit programs
should be no different. A spread is the difference between the mature institution's
cost of funds (and loan loss reserve) and the amount it must charge to cover
its operating expenses. When programs are in the early phases of their growth
curves, these spreads must be estimated on the basis of the expected spread
for the program when it reaches early maturity (three to five years) and the
operating deficit subsidized.
Credit programs, through their budgeting and financial projections processes,

should be able to determine what their final operating costs will be as a percentage
oftheir expected portfolio. This is their expected operating spread at their expected
break-even point and should be the final ingredient in interest rate calculations.
Normally, retail lenders in Latin America operate on a nine- to 15- point operating
spread. Large commercial lenders operate on a three- to nine- point spread.
Micro-business lending is expensive on a per-loan basis and requires a higher
than normal spread. In our experience, that spread is between 18 and 30 percent
for a mature program. The larger the program, the smaller the necessary spread.
For instance, a $300,000 to $500,000 program may need to charge a margin
close to 30 percent whereas a $1.5 millon program ought to operate closer to
a 18 percent spread.
Therefore, a well run, medium-sized, micro-enterprise credit program operating

in an economy with an inflation rate of 18 percent should charge somewhere
around 45 percent annual rate of interest. This would be a positive real rate of
interest of 27 percent. The institution would use 24 percent as a spread to cover
its operating expenses and three percent to m:~intain its bad debt reserve. Its
year-end income statement would reflect a surplUS equivalent to 18 percent of
74 the current portfolio, which would be subsequently reinvested in loans to

micro-enterprises.
IV.C EXTERNAL CONSTRAINTS ON INTEREST RATES

Although charging positive real rates of interest on the order of 27% annually
may be acceptable for borrowers and financially necessary for credit programs,
it may not be easy to actually charge that rate. External constraints, in the form
of legal or policy restrictions on interest rates programs can charge, are both
powerful and pervasive.
Interest rate and fees structures are key financial variables that credit program
financial managers must handle effectively. Reduced revenues resulting from
inappropriate interest rate and fees policies may 'cost' programc more than
inefficiency and waste cost on the expense side of the 'profit and loss' statement.
Subsidized interest rates have long been a mainstay of development lending.

The supposition has been that poor producers are unable to pay commercial
rates of interest and if we are to encourage their activities, these rates must be
subsidized. Further, it is easier to provide cheap capital than it is to provide
cheap raw materials.
Subsidized credit, however, has several negative effects. For the lender it
results in diminished revenue. In the case of micro-enterprise credit programs,
where the average loan size is tiny (under $300), unit costs for each loan given
out are relatively high compared to the revenue generated. The chief drawback
for borrowers is that cheap credit creates a tremendous excess demand for credit
and this rationed credit is usually only avail,ble to a few who have beUer
connections in the banking system.
IV.C.1 Legal constraints

Most governments control the maximum interest rates charged by banks and
other financial institutions. If there is effective control, financial institutions are
almost never allowed to charge 27 percent real rates of interest. Unfortunately,
in most countries, misguided financial sector policies restrict interest rates so
much that they may actually be negative in real terms.
In most countries micro-business credit programs that are managed by

non-profit, privaie associations do not fall under the supervision or regulation of
Sening Interest Rates ,find Other F88S Structures
government organizations in this matter. The only legal constraint they may have 75
to adhere to is a general usury law, which fixes the level of usury interest
(nominal), although local legislation varies somewhat in this area.
As thi9 government's Interest rate polley becomes more and more restrictive,
it can create severe problems within the financial sector. If It is successful in
restricting interest rates far below inflation levels, as the recent history in Peru
shows, it will destroy the national economy, since any available resources will be
taken out of the country. Most attempts at interest rate restriction are not successful,
in part because innumerable ways to circumvent legislation and obtain positive real
rates of return on credit portfolios spring up among lending institutions.
A micro-enterprise program's response to this restrictive interest rate

environment must be to find ways to raise the effective rate on interest paid
by its beneficiaries. Since micro-credit programs also offer a series of other
related services such as technical assistance, training, and insurance, fees
may be c~larged for those servicas, which may actually be used to supplement
income from interest charged. In some countries, while the nominal rate of
interest is controlled, the effective rate is not and the interest may be charged
up front.
IV.C.2 Politieel constrelnts

The positive real rates of interest necessary to maintain successful
micro-credi~ projects are universally accepted by program beneficiaries
since they represent low-cost alternatives to informal lenders (loan sharks).
However, the broader public usually considers these rates to be too high.
This public usually views development credit as subsidized credit at low
rates of interest. Charging 'high' rates of interest to 'poor' borrowers seems
to them to be usurious. Usually, donor agencies are the most adamant
group in insisting on subsidized interest rates for poor borrowers.
Given this, micro-credit programs must be careful about the interest rate
issue. As programs grow in size and impact they also grow in visibility
end threaten special interest groups. This situation makes the very political
issue of interest rates a prime target for external criticism, and, in extreme
cases, legal action. Educating the general public about interest rates is a
task that micro-credit projects must undertake as part of their mission to
provide productive development credit to small-scale entrepreneurs.
t". ~
76 This 'subsidy mentality' arises from basic misconceptions about the costs
to borrowers of obtaining and repaying credit. Explicit financial charges
imposed by Institutions are only a very small part of the total horrowing
costs faced by small borrowers who must take precious time out to do the
necessary paperwork. If the general public were to examine the interest
rate issue from the borrower's perspective, the supposed virtue of the
subsidized interest rate structures would disappear and commercial rates
of interest charged for effective, efficient and appropriate credit services
seem much more attractive. The following section discusses in detail th9
costs borrowers face when they obtain credit, which in turn provides the
justification for charging technically sound rates of interest for micro-credit
loans.
1'i.C.3 Total borrowing costs

Lenders ration the supply of credit they offer through anyone of the three
components of total borrowing cost: a) direct financial costs; b) transaction costs;
and c) accessibility costs. The following sections discuss the different approaches
to credit rationing taken by formal and informal sector lenders and relevant
lessons for micro-business credit program operators.
IV.C.3.a Direct financial costs

Any time a borrower obtains a loan, he or she inQJrs several different types of costs.
The most obvious of these are direct financial costs such as interest payments,
commissions, fees, or other direct charges. In order to standardize the effeds of
up-front charges or required compensating balances left on deposit with lenders, this
cost must be calQJlated as part of the effective rate of interest charged on the loan.
There is normally a great disparity between what banks and moneylenders

charge micro-entrepreneurs for loans. VerI few formal sector financial institutions
lend to micro-businesses. When banks lend to micro-businesses with the same
methodology that they apply to normal borrowers, they find it impossible to 1ake
a profit. The few large lenders, such as development banks, that do operate a
specific line of credit for up-scale micro-businesses conduct this activity to improve
their public image or to satisfy international donor agencies or local governments.
Hence, they usually charge subsidized interest rates on loans to this sector and
consider this type of lending as different from their normal lending activities.
Informal credit is comparatively expensive. Moneylenders are the

micro-entrepreneurs of financial markets. Most of them operate on a very small
Setting Interest Rates cJnd Other Fees Structures
scale, the same general scala as their borrowers. Consequently, they face similar 77
investment opportunities as their borrowers in markets characterized by relatively
free entry and exit.
There is another vital difference between formal and informal lenders. Formal
sector lenders are financial intermediaries that leverage small amounts of personal
capital into large credit portfolios by putting together savers and borrowers.
Informal lenders invest their personal capital directly into their loan port10lios
since they cannot easily mobiliz8 resources ott:er than their own.
Consequently, the supply of informal credit is limited by the existence of many

alternative, lucrative, small-scale productive activities. Since most moneylenders
are not principally involved in moneylending, but rather offer loans as a
complementary service to regular clionts, the financial return to a moneylender
must therefore be at least as high as the returns on productive capital for their
other activities. These returns are almost always much greater that market interest
rates. (Remember that the return on capital to financial institutions is far greater
than the interest rate they charge because they are allowed to leverage a limited
capital into a large credit portfolio through the savings mechanism. They work
with other people's money).
IV.C.3.b Transaction costs

A second type of cost that borrowers incur when they obtain credit is transaction
costs. These are indirect costs imposed by lenders through their deliv~ry systems
but which are not received by those lenders in the form of income.
When a business person works with formal financial institutions, he/she must
take time off from productive activities in order to apply for and follow through
on loans. He/she must frequently hire outside professional services to prepare
feasibility studies or to produce financial statements. Additionally, the potential
borrower must secure the necessary documentation to support his or her collateral
or mortgage guarantees. After assigning a fair shadow price to represent the
opportunity cost of the time a borrower spends in this process, and adding this
cost to the outlays of cash for professional services, transportation, and
documentation, we find that formal credit for small borrowers may entail transaction
costs that far exceed the direct financial cost of a loan.
Informal lenders impose virtually no transaction costs. These lenders take the
credit to the client with a delivery system that is custom-tailored to the client's
Financial Manag~ment of Micro-Credit Programs
78 particular business needs. This is the informal lender's specialty and there are
many delivery systems.
Many wholesalors advance money to micro-businesses when they place a

particular contract. Usually no explicit interest is charged, but the wholesaler
pays less for the finished prodUct than the r,~;cro-business could get elsewhere.
Street commerce frequently makes use of supplier credit, at daily interest rates
of ten percent. The street vendor goes early in the moming to the warehouse
to prepare produce for the day's sales. The supplier gives himlher the produce
on credit, taking repayment at the close of the working day. In established produce
markets, suppliers may make daily rounds of borrowers to collect payments.
In most cases the lender is someone tile borrower dE/als with constantly in
the course of hislher normal business routine. Therefore, he/she ca" l~nd virtually
without imposing any transactions costs. This is very different from formal lenders
who, due to their very nature, impose significant transaction costs.
IV.C.3.c Accessibility costs

The third type of cost that small borrowers must confront when financing their
economic activities is the cost of investment opportunities lost due to inefficiencies
in lender delivery systems. Borrowers often ask lenders to finance some special
business opportunity which they must take advantage of in the short run, or lose.
When lenders cannot deliver credit in a timely manner, borrowers lose
opportunities to purchase inputs or equipment under favorable conditions or lose
important contracts. Of the three components of the total cost of obtaining
financing, this accessibility cost is frequently the greatest.
Informal lenders structure their credit delivery systems very differently from
traditional formal sector cr€dit programs. In relatively 'free' informal financial
markets, it is counterproductive for lenders to impose any cost on borrowers that
they cannot collect directly (direct financial charges). Therefore, credit delivery
systems are designed for maximum efficiency and lowest borrower cost. Informal
lendnrs can make substantial profits by offering excellent service.
co/rnal lenders, on the other hand, lend to micro-businesses to fulfill a given

man~~:\il;~ or in response to external incentives. Since this motivation is 'political'
;::: 'idaolugical'they maintain lower than market interest rates on micro- business
';08.'lS, Since demand is practically infinite for those ~pparently cheap resources,
thtjy ration credit by imposing very high transactions and opportunity costs. This
resol'les the problem of excess demand, but not of institutional viability. 79

Micro-business lending is a losing proposition with subsidized interest rates,
which are insufficient to cover high unit costs, portfolio decapitalization, and bad
debt losses arising from an unwillingness to be tough on delinquent borrowers.
Ironically, through this rationing process, cheap credit becomes very expensive,
and what seemed like usu~"usly expensive credit is really relatively inexpensive.
The following example illustrates this situation:
Assume that Joe Shoemaker needs $200 for 60 days to finance the leather
he needs to fulfill a contract. He needs to repay in one payment at the
end of the period.
His brother-in-law willlfind him $200 for 60 days at 10 percent a month,

since he knows him and has worked with him before. His brother-in-law
will send him the money and will send someone over to pick up the
payment. His brother- in-law has cash on hand which he would send
immediately. Therefore, Joe Shoemaker's total borrowing cost is $40 since
there are no transaction or accessibility costs involved.
Joe Shoemaker is also a member of a credit union since he knows that

a bank would never lend to someone as poor as he. His credit union
would charge him two percent monthly for the loan and require a 20
percent compensating balance to be left on deposit. This means he will
have to borrow $250 in order to take home the $200 cash he needs.
Since Joe lives in a big city, it takes him a half day to travel to rhe credit
union office to do his business once he calculates the time he spends on
the bus each way.
He normally would need to travel four times to the credit union office to
obtain and repay his loan. He needs one trip to get the loan apPlication,
a second trip to bring in the necessary paperwork, a third trip to receive
the loan and a fourth ta repay.
Joe Shoemaker earns approximately $350 monthly and works

approxim:Jtely 240 hours monthly, for an hcturly 'wage' of $1.46.
Suppose also that the credit union did not have the loan ready quickly
and Joe had to take two extra trips and wait an extra week. As a result,
Financial Management of Micro~CrBditPrograms
80 Joe Shoemaker lost an opportunity to obtain a 20 percent discount on

his leatherpurchase and had to buy at the normalprice in order to complsts
his contract on time. The distribution of Joe's total borrowing costs would
look like this:
DIrect tInMcIII out '10

'ft'InIIIcdon..... 32
.. hal dap /18 houra 23
TranspOrtlllion to· ofrlcel 4
P~rk 3
MIIc..xpenIM 2
AOON.lbllIty ooeII
2 half day. /8 how 12
TrantpOrtlllion to oIlcI 2
Loet dilcount ..a
Total borrowing ....
'96
Remember that Joe's brother-in-law would have charg8d JOB only $40
and would have imposed no additional transaction or accsssibility costs.
The telling comparison is thatalthough the crBditunion would have imposed
$96 in total borrowing costs, it would have r8CBived onlJI $10, while JOB's
brother-in-law imposed less than half of those total costs and generated
$40 of direct incoms.
Further, the brother-in-Iaw's very high interest rate of ten percent per
month appears usurious in comparison to the crBdit union's. In fact, it only
tells part of the story, since once we add transaction and accsssibility
costs the creeit union's loan adds up to mors than 20 percent per month.
IV.C.4 Balancing external constraints with mlcro-eredlt program neec:t.

The key to long-term program stability and permanence is to offer a
high-quality service, which means drastically curtailing transaction and
accessibility costs, while charging commercial rates of interest.
Programs must charge commercial intf:'rest rates that are high enough
to maintain the real value of loan portfolios in addition to coverinrJ
operating and loan loss margins. However both legal end political
constraints on maximum interest rates make that difficult in most
countries.
II
Setting Interest Rates and Other F88S Structures
This interest rate dilemma "an best be solved by adjusting a little on all fronts. 81
Except in countries with rampant inflation (more than 50% a year) programs
ought to be able to recover most of the costs of inflation through creative interest
rate and commissions structures. For instance, in an inflationary economy of 18
percent, the program should capitalize at least 12 to 15 percent. Effective Ct'9dit
methodologies can keep loan losses to a bare minimum. Most ACCION- affiliated
programs have loan loss rates of less than two percent annually of their current
portfolios.
If programs are to charge commercial rates of interest, then they must develop
a very efficient credit methodology in order to reduce operations costs for the
institution and transaction and accessibility costs for borrowers. Credit
operators must look for creative ways to reduce their own costs by passing
on to borrowers many important elements in the credit process while at the
same time reducing to the bare minimum the borrower's transaction costs.
ACCION International and other successful micro-credit operators have done
this well.
These programs are able to reach large numbers of micro-enterprises with

credit because they are formal sector lenders who have adopted informal lenders'
total borrowing cost structures, and in most cases have lower total costs than
those same informal lenders. They beat them at their own game.
Successful credit programs such as the BKK, the Grameen Bank, and
Fedeccredito all take the loans to the borrower's workplace or home village.
ACCION's programs all do a significant portion of the loan application and
renewal process in the borrower's workplace, and office time is kept to a
bare minimum. They all charge rates of interest equal to or greater than the
preferred bank rates reigning in their respective countries.
In a typical ACCION program, borrowers are granted a line of credit for

working capital. After the initial loan, which may take up to four visits to
obtain, subsequent loans require only two office visits. In one visit,
borrowers fill out simplified loan applications, and in the other they pick
up their checks. All repayments are made in local branches of banks,
which cuts down enormously on repayment transaction costs. In some
programs, when the borrower is in good standing, the application is filled
out in the workplace, and the borrower makes just one trip per loan: to
pick up the check.
I
82 Loans are almost never delayed. The day a participant in good standing
makes his/her lasl payment, the subsequent loan is waiting. This feature,
perhaps more than any other, represents these programs' strength. Should
there be a liquidity problem, ACCION affiliates restrict credit to new participants
before they allow already participating micro-businesses to suffer delays in
credit service.
The total cost structure for Joe Shoemaker in a typical ACCION-affiliated

program might look like this:
Direct financial c08t $15
Transaction costs
2 half days I 6 hours
Transportation to offices
Paperwork
Misc. expenses
Total Borrowing COlts
In addition, most programs offer a variety of other services and benefits

that create a strong identification between them and their participants. This
allows them to 'compete' with informal lenders on other than strictly economic
grounds.
I ~_? .
Photograph: Miguel Sayaga
V SIMPLIFIED BUDGETING
AND FINANCIAL
PROJECTIONS
Realistic budgeting and accurate financial projedions are primary tools for any
financial manager. The budgeting process requires managers to balance program
goals and objectives and bring these within the real restraints of limited resources.
It provides an ongoing control of the program's performance based on these goals
and assumptions. Comparisons between budgets and real expenditures provide
constant feedback about changing environments and how these affect basic
programmatic assumptions. This in tum keys managers in to necessary adaptations.
Besides being tools for constant feedback, budgets and financial projections are
the basis for agreements with donor agencies. Better budgets and more accurate
projections allow one to negotiate realistic agreements. One thereby keeps
expectations within reason and does not plant the seeds of one's own failure.
During the first three to five years of a credit project's existence, one of its major
challenges is to reach its break-even point. Program designers must decide about
potential target group location, average loan size and terms, funding source mix~
and general administrative structure. These issues can be successfully managed
with the n;jimentary financial projection techniques presented in this chapter.
Once institutions are established, have reached their break-even point, and have
reached a certain maturity in their administrative structures, they can more appropriately
embark on sophisticated long-range budgeting and planning. They can use time series
analysis, cyciaal analysis, and other high-powered toc;»ls to predict expense and portfolo
behavior over time with a relatively high degree of 8CQJracy. However, nascent
institutions in new, unexplored markets, operating on tenuous funding bases, would
not find these tools helpful. Rather, they would be a waste of time and effort.
Although simple, budgeting is a difficult process, especially in a new and

dynamic organization. Budgets and financial results are very sensitive to errors
in basic assumptions about critical areas such as inflation and interest rates,
86 exchange rates, or demand for services. Rapid institutional growth further

complicates budgeting because the evolutionary process may be difficult to
predict in poor countries with unstable economies.
The following is a step-by-step guide to simple financial projections for

newly-launched micro-enterprise projects. While there is no one best way to
project, the rest of this chapter highlights the major issues involved in credit
project budgeting. Sample projections for a micro-business credit project are
provided which illustrate the key variables which should be included. These
sample projections were those used initially to set up ACCION's affiliate in Chile,
PROPESA, which initiated its activities in OCtober 1988.
V.A SPECIFICATION OF TARGET GROUP SIZE AND

DISTRIBUTION
The first thing a manager must do when he/she actually sits down to do specific
financial projections for a nr '. program is determine the size and location of the
potential 'market'. Whether \I, not that 'market' is tightly concentrated, or widely
dispersed, will fundamentally affect '(he administrative structure and the credit delivery
system he/she employs.
In most major urban markets this task is simple. Since potential markets for the
credit program's services far outstrip its growth potential during its first years, the
manager need only make basic decisions that pinpoint the 'barrios' where the program
will focus its attention.
In smaller urban centers, or relatively moP3 advanced economies, the task may
be more complicated. Program goals may require reaching out into secondary cities,
and even rural areas, with credit services. Such is the case in Chile or Costa Rica,
which are relatively developed countries where the infonnal sector occupies only 15
percent of the total work force. Within 18 months to two years, project goals will
probably require the programs to look outside the principal urban centers for
participants.
This type of expansion requires relatively careful attention to estimations of

potential market size in smaller cities in order to determine ,the appropriate
administrative structure for the credit program. Almost without exception, good
data about micro-enterprise distribution does not exist and market size must be
inferred from secondary data.
',' "
r
Simplified Budgeting and Financial Projsctions
The best secondary databases are census and employment data. Census 87
data usually disaggregates employment on a regional and communal level, which
allows one to infer the possible informal sector composition, even in rural areas.
The key variable for this purpose Is the size and composition of the sector that
works as 'self-employed' in firms of fewer than five employees. This provides
one with a total employment picture for a given area.
Subsequently we must determine how many of these 'self-employed' are

actually micro-businesses and how many are employees of micro-businesses.
A good rule of thumb is probably that somewhere around 40 percent of the
self-employed are actually micro-businesses, in given industrial, commercial and
service sectors. One must be careful to exclude service occupations such as
domestic employment. The basis for adjusting specific occupations is the
International Labor Organization's classification of employment by type, which
most national census bureaus use when they analyze their data.
These results provide one with a universe of existing micro-businesses.

However, a successful micro-credit program must select only the best of these
businesses, since many are so precarious that they would be poor credit risks.
In all probability, only ten to 50 percent of the existing micro-businesses in any
given area are probable program participants. One must be careful not to assume
that all informal economic activities are creditworthy micro-businesses.
V.B PRE-FEASIBILITY ANALYSIS

Budgeting necessarily requires trade-offs and a distribution of scarce resources
among many clamoring needs. Only by maintaining clarity in institutional goals and
objectives can managers make effective budgets. Reality, reflected in budgets, will
demand that some institutional goals and objectives be subordinated to others. The
budgeting process itself is usually an ey.~!IAnt opportunity for managers, board
members, and staff to define these relative priorities more explicitly.
Once the manager has clearly defined the institutional goals and objectives, one
must do a pre-feasibility study before laying out a detailed budget. To do such a
study, one must 1) carefully outline the results they expect to obtain with the resources
they have at their disposal, 2) make basic assumptions about program IT1flthodology
and growth curves, and 3) define general program performance parP.meters. This
study will show whether or not the numbers are likely to work.
88 Projections of program performance over a period of thl'8e to five years of rapid

expansion 81'8 very susceptible to errors due to minor miscalaJlations when making
underlying assumptions about intel'8st, inflation, and late-payment rates and cost
structul'8s. Since one will never be able to project with certainty, one must I'8duce to
a minimum the 'slop factor' - one's tendenc..y to round everything off to general values.
Basic assumptions can be divided into two categories: assumptions about

external economic variables and assumptions about the program itself. One
should answer the foliowing checklist of basic assumptions before one even sits
down to do detailed projections.
PROJECTIONS: MAJOR ASSUMPTIONS
Extlmal Factors
Projected annual inflation rate
Prevailing Interest rate for preferred clients of banks
Prevailing interest rate for finance corJ1)anies
Prevailing interest rate for loan shal1<s who might do business with
micro-entrepreneurs
Number and distribution of potential participants
Program FlICtors
Resources available to finance project
Sources of funds
Cost of funds
Amounts available
Amortization schedules
Conditionality
....lIodology
Credit delivery system (solidarity groups, individual loans)
Average loan size
General salary level for staff (CtHrJNJ1'BbIB to publlcSBClrJr, ptfvat8 sector, banks, NGOs)
Portfolio rotation
Number participants
Other services to be offered
Managers can do a quick pre-feasibility study for the micro-eredit project using
the worksheet on the following page in order to identify the scale of operations
1II necessary to reach the break-aven point. These variables can also be presented
in the form of the following mathematical formula, for those who prefer. In this
formula, the financial spread is on one side of the equation, and the operating
costs on the other:
II
Simplified BUdgeting and Financial Projections
( 1- CF) x P = INC + FC + ( VC x n ) 89
where:
I • interest rate charged on loans
CF. weighted cost of funds for loan portfolio
P • loan ponfolio
Inc. loan loss estimates
FE • fixed costs
VC • variable costs per current operation
n • number of loans
PRE-FEASIBILITY WORKSHEET
VALUE
Revenue generation:
Amount resources avallabla for loan portfolio
Prevailing monthly interes~ rate for finance company loans (X),_ _
A: Total monthly revenue at break-even point
COlt of fund.:
Amount resources available for loan portfolio
Monthly Inflation rate or effective Interest rate
(In case of borrowed funds), whichever Is higher (X)~.__
8: Cost of fund
Loan 10. . . d .... to Irrecoverableloana:
Amount resources available for loan portfolio
Estimated loan losses as percent loan portfolio (annual rate/12) (X),_ _
C: loan loss expense
Fixed operating Ixpenll8:
Rent (200 m2)
Fees (audits, legal, co~er support)
Insurance (fire, theft, car)
Publicity
Materials
Utilities (+)---
D: Fixed operating expenses
Variable operating Ixpen...:
Number active participants ( -) 100
Number of staff
Monthly salary of credit agent (X)_ _
Total estimated salaries .
Transportation and materials costs (number current loans x '1) (+)'---
E: Variable operating expenses
F: Total monthly expenses (8+ C+ 0+ E)
G: Net monthly sUrplus or deficit (A-F)
90 Whether financial managers use the break-even formula or the pre-feasibility

worksheet, the process they go through is similar. By substituting different values
for the key variables they approximate the final values they will need to aim for when
they do their more detailed budgets later. Managers should start with those variables
which are relatively fixed, such as amount available for the loan fund or interest
rates, and then adjust the final resu~s on the basis of the more flexible factors.
It shouldn't take much more thaj1 an hour to narrow down the general
assumptions for the micro-credit project using this technique. Now managers
can proceed to the detailed budgets which will guide their monthly financial
decisions. The detailed budgets provide important insights into the growth
curves programs expect, whereas the pre-feasibility analysis or break-even
formulas only provide clues as to the values of the key variables at the
break-even point.
v.e PORTFOLIO GROWTH PROJECTIONS .

In order to predict portfolio growth curves accurately, managers must determine,
according to the credit delivery system employed, the average loan amounts,
terms, repayment schedules and the estimated numb6r of credit recipients. These
variables will determine the size of the current portfolio and the cash flow
associated with the lending operations.
If credit managers plan to have different types of loans within their portfolios,
where average loan amounts and terms vary greatly, they should estimate
each of these sub-portfolios separately. Separating these portfolios allows
managers to examine each type of loan for its contribution to overall program
goals and objectives. Thus, in the PROPESA projections, one sees a portfolio
for working capital loans, a portfolio for equipment purchases, and a combined
portfolio.
The key varllblel one u... In portfolio projection. are the following:
Average loan size

Repayment liCl1edule and term
Nunmer new participants
Drop-out rate for participants
Delinquency and default rates
Simplified Budgeting and Financial Projections
91
From t.... varlablH one calcu.at..:
Total amount disbursed
Total amount repaid
Current portfolio
NuntH:r subsequent disbursements to existing participants
NuntNlr active participants
Total number participants served
Average outstanding loan balance
NuntNlr outstanding loans In current portfolio
Credit delivery systems and methodology determines average loan terms,

drop-out rates, expected delinquency and default rates, and repayment
scheduling. Once they choose a methodology, the only two key variables
managers can really manipulate to alter the financial results of a credit project
are the average loan size and the number of participants. Of these two, average
loan size is the more powerful for adjusting projected financial results. If managers
increase the number of participants, the level of expenditures also increases.
whereas they can increase loan sizes without increasing costs.
Average loa" sizes can be adjusted substantially either way from targeted loan
sizes specifi9d in genorall methodok;~ies without making any significant impact
on the effectiveness of loan disbursem~~)t and recovery. The greater the average
loan size, the fewer the number of rJossible participants, given limited available
resources for the current portfolio. Ultimately this reflet:ts the trade-off managers
face between project impact goals and institutional survival goals.
In the case of Chile, presented in the sample projections, the average loan
size was increased almost 100 percent from the typical ACCION program's
average loan size. This change emerged because the program in Chile depends
on funds borrowed from the commercial banking sector at bank interest rates to
fund its portfolio and because the maximum in~erest rate it could charge allowed
for only a very narrow financial spread. This narrow spread forced PROPESA
to raise its average loan size and to lower its unit operating costs to a bare
minimum. PROPESA's break-even loan portfolio is over a million dollars, even
though in most of Latin America it could be considerably less. PROPESA pays
a positive real rate of interest Tor i~s funds from the commercial banking sector.
Fortunately micro-businesses in Chill:) are also relatively larger, and able to absorb
those larger loans.
92 In other countries, where spreads are greater, average loan sizes can be kept
to a minimum and thereby maximize program impact given limited loan fund
resources.
One of the most useful variables managers should manipulate when they do
portfolio projections is the average outstanding balance which indicates the
average amount of a loan on the street per participant during the term of the
loan. To calculate this balance for a specific loan, one divides the loan principal
by two and adds to that result 50 percent of the average principal amount of
each monthly installment. To calculate this for the portfolio as a whole, one
divides the current portfolio by the number of active participants.
One can use this variable to calculate the profitability of a particular loan. By
multiplying the average outstanding balance by the effective interest rate on that
loan the manager has a 'quick and dirty' estimate of the revenue generated by
that loan on a mor!thly basis. If one compares this to the unit operating cost
calculated previously, one can find the minimum average loan sizes necessary
to reach the break-even point.
Another key variable for managers is portfolio rotation, or the number of times in
a year the entire portfolio is tumed ever or re-Ient. If managers find that their financial
results are too precarious, they can reduce their administrative burden by increasing
average loan tenns. By increasing from average loan terms of four months to average
loan terms of six months, programs can reduce variable operations costs by 30%
without necessarily reducing methodological effectiveness.
V.D DEFINITION OF TOTAL COST STRUCTURE

Once managers have laid out their basic assumptions and determined the
general characteristics of their ~redit prog..am they are ready to do a detailed
budget I')f lperating and financial expenses. This is the most complex part of
financial projections and requires clear thinking and sharp analysis.
In order to protect themselves against unforeseen events, managers should be

conservative in their budget proOess. They should be thorough and meticulous when
they estimate expenses. One is usually very good at calculating expected revenues
and major line items 01'1 the expense side. However, ignoring small items can be very
dangerous and can eliminate even oomfortable margins built into major line items.
When one takes the time to include a series of apparently insignificant minor expenses
Simplified Budgeting and Financial Projections
(such as cleaning. commiS!dons, 199al expenses. remodeling. publicity) in budgets. 93

overall expenses frequei1tly incres\S8 by as much as 30 percent. Such a change
can dramatically alter overall projed performance.
Managers should also be realistic. Excessive padding will only lead to a loss
of budgetary control and administf.:ltive order. Managers who pad their budgets
excessively usually do so on big line items and ignore little ones in order to
present a reasonably acceptable budget to boards or donors. The ensuing game
of underpaying employees. re-allocating expenses among line items. and expense
sharing among major contributors can be a very dangerous one with dire
consequences. Further. it is simply bad management. If budgats are not realistic.
they cannot be a useful management tool.
Once the institution opens ~s doors it will inaJr a series of expenses. no matter how
big or small the ensuing program. The fixed costs are the baseUne of the budget.
below which it will not fall. Next. the manager must projed the variable costs ~ated
with the service rendered. in this c:ass credit. One may divide these various costs into
three categories: operational costs. loan loss provisions. and financial costs.
V.D.1 Fixed costs

Fixed costs are those costs which are relatively insensitive to changes in
service level. For instance. office rental, executive level ~~Iaries. insurance. and
auditing costs are relatively constant over the short term. regardless of whether
the institution disburses 100 or 300 loans a month. Clearly in the medium or
long run all costs are variable. since as an institution grows it inevitably needs
more o~!c.e space. hires more executives. and has more transactions to audit.
Nevertheless. for budgeting purposes. costs that remain relatively constant in
the short run should be considllred as fixed costs.
FlIed COlt. would nonNIlly Include 'M folloWing Keml:
Administrative salarie~, and benefits

Department head salaries and benefits
Auditing, legal, corT1)Uter, miscellaneous fees
Rent
Insurance
Equipment maintenance and repair
Publicity
Basic office materials
Utilities (water. electriclly. telephone, gas. etc.)
94 One-time or occasional fixed expenses (audits, etc.) may be pro-rated over

the course of the year or budgeted in the period in which the expense will actually
be incurred. Pro-rating has the advantage of smoothing out the self-sufficiency
curve, allowing managers to see more clearly the progress they are making
towards this important financial goal.
V.D.2 Verlable operating costs

Variable operating costs are those administrative costs associated with the
credit service itself. In essence, it is the direct cost of making and recovering a
loan. Typical operational costs include:
Operational coat.:
Field staff salaries and benefits
Some support staff salaries and benefits directly related to credit
and accounting functions
Transportation of field staff
Materials costs for loan documentation
Per diem, if paid
Bank charges for repayment handling
Information services on clients
The basis for determining variable operating costs is the projected caseload
per field staff and support staff. This in tum depends on program methodology.
For instance, in Chile, the variable costs were calculated in the following manner:
VARIABLE COSTS:ASSUMPnONS
1 credit. official x each 150 loans disbursed quarterly

1 support staff x each 450 loans disbursed quarterly
.. bus trips x each loan disbursed
SO.58 in bank fees for each outstanding loan per month
SO.60 Information service fees for each loan
CllCulatlona:
Credit official ($900/150 loans) • $6.00
SUpport staff ($600/450 loans) • $1.34
Transportation • $1.06
Bank fees • $3.50
Infonnation service • SO.60
Total • $12.50
Simplified Budgeting and Financial Projsctions
These expenses may be distributed as they occur, rather than placing them 95
all up front at the moment the loan is disbursed. This would reflect cash flows
more accurately. Since variable operational costs increase geometrically with
program growth, small miscalculations can make major differences in final program
results. It is eS~'8cially important to be careful when determining basic assumptions
and to be precil;e about all costs, by attempting to define as narrowly as possible
their exact amounts.
In the sample projections, variable costs are presented in a disaggregated

way and salaries are projected only in whole person increments. This ensures
that the true costs will be more accurately estimated. This system is preferable
to the consolidated variable cost presented earlier.
V.D.3 Financial costs
As we discussed in an earlier chapter, each loan has a cost of funds associated
with it whether the credit program pays interest for loans from other lenders, or
whether it seeks to maintain the value of its portfolio against inflation. This cost
must be added on to the variable operating costs. The calculation of variable
financial costs is quite simple and can be seen in the following example, again
from Chile:
VARIABLE FINANCIAL COSTS: BASIC ASSUMPTIONS
Balle -.nptIone:
Cost of donations • average annual inflation rate of 9%
Cost of private bank loans • 12% alVllally
Donations available USS 620,000
Loans available 400,000
: USS 1.020.000
(Amount donations-1otal funds) x 9%. 5%

(Amount IoantJlotal funds) x 12% • 5%
Average cost of fundi • 10%-- .
The variable financial cost would be ten percent annually of outstanding loan
balances. The easiest way to handle this within the projections is to divide the
annual interest rate by 12 and apply the monthly interest rate to the outstanding
loan portfolio.
96 This interest rate must be increased to take into consideration any other fees
or commissions that may be associated with private bank loans to the program.
These fees are included by calculating the annual effective rate of interest paid
by the program for its bank loans rather than the annual nominal rate of interest
it pays. Remember this effective rate of interest is not to be confused with the
effective rate of interest paid on investments (compounded interest for savings)
since interest income is not reinvested, but rather spent.
V.D.4 Loan losses

This cost should be explicitly included in financial projections of program
performance rather than being implicitly worked into other line items. It is of such
fundamental importance that it deserves a line item to itself. Besides, explicit
inclusion of this provision in the total cost structure forces more careful thinking
about the final net effect of delinquent loans. Not only must revenue be readjusted
downwards, but current portfolio amounts must be readjusted likewise to reflect
the loss.
Loan loss rates are calculated in the same manner discussed in the chapter
on setting interest rates. The best indication of the amount to be expensed is
the historic write-off record of the credit program, as long as it religiously writes
off all uncollected debt after a certain collection period. If the institution has
recently initiated activities, it should create a loan loss provision equal to five
percent of all net monthly increase in the current portfolio in order to maintain a
reserve equal to five percent of the total current portfolio annually.
Loan loss rates should be calculated on a monthly basis and added to the
average cost of funds for the program. Loan loss expenses are costs per monetary
unit lent, similar to variable financial costs. Variable operating costs are usually
more accurately calculated as costs per loan rather than cost per monetary unit.
Therefore total variable costs are not necessarily applied to the same basic unit
of analysis, a~hough they can be put on common ground at a later point using
given assumptions about average loan size and terms.
V.E INCOME GENERATION

Tt,~ method for establishing interest rates for loans was discussed in the
previous chapter. Nevertheless, there are two important points to remember when
one projects income generation. The first is to remember the difference between
standard accounting practices and real cash flows. Normal accrual accounting
Simplifi8d Budgeting and Financial Projections
practices require interest income generated by a loan portfolio to be accounted 97

for as an accounts receivable the moment it is earned, especially if expenses
are also accounted for as they are incurred. When the interest is actually paid,
it is deducted from the accounts receivable and transferred to interest received
0:1 the income statement.
For cash flow purposes, income from loans is not available to cover expenses
until it is actually paid. Thus, an income lag must be built into all portfolio
projections where the in~me earned in month one is actually paid in month two.
Second, managers must account for loan delinquency. Late repayments,

although they may not directly result in loan loss expenses, will lower portfolio
rotation, and delay the actual receipt of interest income. This fact should be
accounted for explicitly in the financial projer,tions if delinquency is greater than
five percent of the current portfolio. This means that a certain percentage of the
interest projected from the portfolio should either be further lagged or deducted.
Ease of projections dictates that it be deducted since the collections costs of
that interest frequently exceed the potential income received and is very hard
to estimate. Remember that bad loans must be deducted BOTH from the expenses
and from the current portfolio.
V.F SOURCES AND USES OF FUNDS

The final part of any thorough budgeting process is a sources and uses of
funds projection. Once the entire budget has been worked out, managers should
identify, by major line items, the source and amounts of funding available. This
helps the manager identify areas in which additional resources need to be
mobilized or areas where there may actually be an excess of available funds.
This exercise also helps the manager determine relative priorities in the
application of locally generated revenue. Finally, this sources and uses projection
• provides the basis for grant applications and eventual reporting on monies
received.
V.G FINAL COMMENTS

Unforeseen events usually seem to impact negatively on project performance.
Perhaps this is due to overty-optimistic forecasting, or perhaps it is just that
positive impacts are too often overtooked or one assumes that they are the result
98 of sound management and planning. Eventually, most projects will suffer a crisis
that arises from the difference between the reality of project implementation and
the fundamental assumptions upon which budgets and projects were built. In
these cases, institutional survival may depend on the margins for error which
were built into these budgets and the flexibility with which resources can be
reallocated among major line items and activities.
One way to build in sufficient margin for error in budgets is to be conservative,

yet realistic, when one specifies one's basic assumptions and general program
performance parameters. These parameters include indicators such as number
of loans disbursed, level of financial self-sufficiency reached, size of current
portfolio, and total number of project participants.
Assumptions about the evolution through time of the program's portfolio and
operating structure - its growth curve - are a fundamental variable which
determines final program results. There is a great difference betweon similarly
sized programs, one of which reaches self-sufficiency in 30 months but needs
a $200,000 subsidy, and another which only needs $100,000 over the course
of those same 30 months because of its different growth curve.
Remember, overly optimistic budgets and projections plant the seeds of our
own failure. It is preferable for project supporters to be pleased because the
project surpassed its goals than for them to be displeased because it fell short,
even though its performance within a given context might well be excellent.
Budgeting expenses and projecting portfolio growth represents a very complex

process, requiring a great number of interrelated assumptions underlying the
final results. A manager will greatly facilitate the process of budget revision and
readjustment if one disaggregates to the greatest possible extent the different
Iina items and cash flows. This process allows one to test each underlying
assumptio~, and track its implications. At a later date one can more easily change
that assumption and understand its effect on final results.
Managers should not budget primarily to satisfy donor agencies or boards of

directors. The type of ~udget that satisfies the demands of either of these two
groups is often different from one that carefully tracks the administrative
performance of the institution. The latter normally requires much more detail.
Hence, the preferred alternative is for managers to develop detailed internal
budgets, which they then synthesize for general dissemination.
SimplifiBd Budgeting and Financial Projections
In countries where annual inflation rates regularly exceed ten percent, budgets 99
must be adjusted accordingly. Inflation affects different parts of the budgets
differently. Salaries tend to be readjusted upwards at a considerably slower pace
than inflation, whereas most non-salary costs increase at or above inflation rates.
Inflation shrinks the real value of local currency loan portfolios, which in tum
reduces that portfolio's capacity to generate income sufficient to meet growing
expenses.
Managers frequently budget in U.S. dollars. This is because most grants they
sign with international donor agencies are denominated in dollars. When
institutions budget and sign grant agreements in dollars they must also pay
attention to the exchange rate controls imposed by the local government. Artificially
low official exchange rates will turn relatively healthy looking dollar budgets into
tiny local currency budgets, with the primary beneficiary being the local
government in the case of actual foreign currency transactions.

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I' - " , ,'" .

P. 53 Last line should read: The Liquidity Adequacy Ratio

P. 56 Title of Box with Formula 17 should read: Ratio of Fixed

P. 65 Formula at bottom of page should read:

P. 70 Second Component of Table III should read:

P. 89 The fifth variable listed in the top box should read:

A GUIDEBOOK FOR NGOs

by Robert Peck Christen

The manual draws on the collective experience of the affiliate organizations of

The Inter-American Foundation and the GEMINI Project of Development

In Lagos, for example, 50% of all employment is in the informal sector. In

Consequently, international donor agencies are significantly increasing funding

4 management systems. Successful micro-enterprise lending requires a high

This manual offers basic financial management tools to executive directors,

As a result, the recommendations contained in this manual reflect the credit

This manual is a practical, hands-on treatment of specific issues that are

Developing a good information system requires the investment of substantial

We freq'~ently see management by "crisis" due to inadequate information

PreYloa' Page Ilad

8 a clear picture of either their client's characteristics or their awn service-delivery

We in micro-business credit programs are no exception. Computerized

However, managers must understand that bringing computers on line in their

II.A HARDWARE CONFIGURATIONS

conceived information system can operate efficiently witn computers of very 9

The optimal hardware distriblJtion is probably to have at least one relatively

It is usually more comfortable to purchase the auxiliary computers with hard-disk

What is indispensable is that all of an NGO's computers be able to talk among

More sophisticated programs allow the partitioning of hard-disk capacity on

II.A.4 Technical support

It is sometimes useful to sign a maintenance agreement that will ensure against

computer maintenance into their general opel"'dting expenses in accordance with 11

There are three basic types of equipment:

II.B SOFTWARE DESIGN

12 financial statement. The only commercially available fund- accounting program

The cost of developing a locally generated software package that integrates

Several integrated packages are available from ACCION-affiliated programs that

11.8.1 Client-management systems 13

FIELD WORKER 001 - GABRIEL ARAYA GAETE

000132 LOPEZ, MARTA SANTIAGO, 428 SAN JOAQUIN SAME SEAMSTRESS

PARTICIPANT No. No. 1.0. FIELD

14 11.8. 1.b Maintain client's business information

CUrrent .....ta Cur,.t LllblilllM

a.... Totll sell.

stetus, and personal capital accumulation, as shown in Report 3. This data is 15

FEMALE 2 ... 40%

• Numbe,. filled In u example of information obtained.

II.B.1.c Track individual/oans 17

These reports should be produced either daily or weekly, depending on the

LOAN SYSTEM PAGE 1

TYPE LOAN: 2 • WORKING CAPITAL

DATE DATE ANAL

0220000301 LOPEZ 44.088 () 2.5% 0 6.036 3/14189 12106188 O8t'2O.'n

0220000401 LARA 68.880 6 2.5% 1 13,8A2 2110/89 11/16/88 0312018I

1116189 06 WHITE 5156 1694 2500 2.0 13751 14 9126188 CAI.LE,

FIELDWORKER: 001 GABRIEL ARAYA

No. TERMS No. DATE

040128 ROJAS, MARTA 74,447 6 16,486 2 3/4189

TOTAL FOR FIELD WORKER 428,377 90,261