Defining terms and standards

Resources

1. "Definitions of Selected Financial Terms, Ratios and Adjustments for Microfinance", SEEP Network, Nov 2002. ATTACHED * definitionstermsRatios.doc: SEEP Network
2. CGAP Documents
   • Internal Controls
3. "The NGO Microfinance Stnadards: Toward Outreach and Sustainability", Philippine Coalition for Microfinance Standards, August 1998 (funded by USAID)
4. "Deliquency Management and Control and INterest rate calculation and setting", CGAP.

Terms and definitions

1. Arrears and Aging of the portfolio
2. Microfinance and interest rates
3. What data is needed or used in the field?
4. What roles to local formal banks play in the operations of Microfinance?
5. How to think about groups and individuals in lending methodologies.
6. Notes from SEEP Conference FRAME discussions

Microfinance Terms

• Active Client - a) one who has an existing loan or capital built up in an account. b) one who has been making payments within the last 60-180 days.

• Balances of Loans past due - Outstanding balances of loans with at least one scheduled payment (amortization) missed.

• Black List - list of customers who are no longer permitted to participate. Such lists can be shared between MFIs.

• Cashpor housing index - a poverty assessment tool. Lending in microfinance is targetted to the poor, so efforts are made to ensure that targetting is accurate. This is a formal tool and approach which provides meaningful proxy data to the question - "are you poor enough" to get the loan. Resources at Article

• Current portfolio –the outstanding value of all loans that do not have any installment of principal past due. It does not include accrued interest.

• Gross loan portfolio {b1} (#1) - the outstanding principal balance of all of the MFI’s outstanding loans including current, delinquent and restructured loans, but not loans that have been written off. It does not include interest receivable. Although some regulated MFIs may be required to include the balance of interest accrued and receivable, the MFI should provide a note that provides a breakdown between the sum of all principal payments outstanding and the sum of all interest accrued. Some MFIs choose to break down the components of the gross loan portfolio (see B2, B3, B4). The gross loan portfolio is frequently referred to as the loan portfolio or loans outstanding, both of which creates confusion as to whether they refer to a gross or a net figure. The gross loan portfolio should not be confused with the value of the loans disbursed (see P1 below).

• Interest expense - Summation of two components: (i) interest paid and due to banks and other financial institutions for money loaned to the organization; and (ii) interest payments earned by clients who have deposit accounts with the organization.

• Operating Income -Refers to interest income, fees and other income arising from microfinance operations.

• Operational Self-Sufficiency ratio - essentially a measure of profitability, the OSS is calculated as the fees and interest paid by the client over the cost of service delivery for the MFI. An OSS of 100% is breakeven for covering variable costs. Sunk capital costs are not included typically.

• Past due Loans with at least one missed amortization.

• Performing portfolio {b2} (#1)– is part of the gross loan portfolio which includes the value of all loans outstanding that do not have a principal installment of principal past due beyond a certain number of days and have not been rescheduled or restructured (see B4). It does not include accrued interest. A standard of ≤ 30 days is common, but regulations may require MFIs to use a different standard. The MFI should state clearly what the definition of the performing portfolio is.

• Portfolio-at-risk {b3} (#1)– the value of all loans outstanding that have one or more installments of principal past due more than a certain number of days. This item includes the entire unpaid principal balance, including both the past due and future installments, but not accrued interest. It also does not include loans that have been restructured or rescheduled. Portfolio at risk is usually divided into categories according to the amount of time passed since the first missed principal installment.

• Restructured portfolio{b4} (#1)– the principal balance of all loans outstanding that have been renegotiated or modified to either lengthen or postpone the originally scheduled installments of principal, or substantially alter the original terms of the loans. This item also includes refinanced loans, which are loans that have been disbursed to enable repayment of prior loans by clients who otherwise would have been unable to pay the originally scheduled installments.

• Loan loss reserve{b5} (#1)– the portion of the gross loan portfolio that has been expensed (provisioned for) in anticipation of losses due to default. This item represents the cumulative value of the loan loss provision expenses (I6) less the cumulative value of loans written off (P5). This is also referred to as an allowance for doubtful accounts. / It should be noted that the loan loss reserve is usually not a cash reserve, but rather an accounting device to provide the reader information about the size of the anticipated loan losses from past due loans. The reserve is built up from specific provision expenses related to the portfolio at risk (B3) or in some cases general provision expense against the entire gross loan portfolio (B1).

• Write off - The act of removing a bad, or non-performing loan, from the assets side of the balance sheet. This usually occurs after all attempts have been taken to activate or collect a portion of the loan. The write-off policies of organizations should spell out at what point loans are written off. It is also used to indicate the amount of loans actually written-off.

• Term definition.

Mifos Terms

• Accounting Plug-ins and Connectors - referring to the design of a system where both systems communicate through messages (and not remote methods or proceedures).

• Area - one level of the organizational hierarcy: Branch, Area, Region. There may or may not be a physical location. Not all MFIs have the same number of levels.

• Bulk Entry - the concept in the design where all transactions for a specific period and operator are batched together in a single display and then subsequently posted to the ledgers. The concept also includes the printing of the expected payments for that period/operator.

Common concepts from banking.

• Account Statement - printed report of balances of accounts for the customer.

• Account(s) - customer hold and account with the banking entity.

• Arrears

Interest rate calcuations

• Interest The amount a borrower pays in addition to the principal of a loan to compensate the lender for the use of the money.
• Interest Rate The expression of interest as a percentage of the principal.
• Nominal interest rate The stated rate to be paid on a loan contract, usually as a monthly or annual percentage. It does not reflect inflation or take into account related loan fees, commissions, and other expenses.
• Effective interest rate Converts all financial costs such as interest, fees and commissions into a declining balance interest calculation and includes the effect of compounding. The effective rate represents the financial cost to the borrower. It includes all financial charges as a percent of the loan amount used during each payment period and represents everything the MFI earns. (The best way to calculate this rate is to use the internal rate of return function on a financial calculator.)
• Annual percentage rate (APR) The rate of interest on a declining balance for a period (for example for a month) and then multiplied by the number of periods in a year (for example 12 months) to get the annual interest rate. The key difference between APR and effective interest rate is that the APR does not include the effects of compounding or forced savings Real interest rate Adjusts the interest rate to reflect the rate of inflation. A negative real rate implies that the rate of interest charged falls below the inflation rate. People frequently speak of positive rates of interest to mean that the rate is set above the inflation rate.
• Interest Spread The amount between the nominal lending rate and the nominal rate of interest paid on savings stated as a percentage.
• Flat rate method Interest is calculated by multiplying the term of the loan by the monthly interest rate by the principal amount, irrespective of the payment plan (which may be a lump sum or in installments).
• Flat Rate Method Interest is charged on initial loan amount rather than outstanding loan balance.
• Declining Balance Method Interest charged on outstanding loan balance at given point in time, hence interest amount is different for every period.
• Variable interest rate - the nominal rate changes according to external factors, such as the national inflation rate. Variable interest rates can only be applied to declining balance methods.

working area - items requested for definitions

1. Active Funds Accounts - refers to funding sources that can be used when doing disbursement in the system
2. Administrative fee structure
3. Aging of Portfolio - banking
4. Annualized interest rate
5. Associated borrower Accounts
6. Audit Trail
7. Audit Trail for Transactions
8. Average Balance on Account
9. Back Office Systems
10. Bank routing of checks?
11. Borrower
12. Branch Accountant
13. Branch Manager
14. Branch Office
15. Branch Supervisor
16. Bulk Transfer - mifos term refers to need to do field officer centric design where a key task is doing all of the transactions for a single day in a simple interface as a single batch concept.
17. Calculation Periods
18. Cash Management
19. Center
20. Client
21. Client Assets
22. Client Income Levels
23. Client Loan Application
24. Client Management Tool
25. Co-Guarantors
26. Collateral
27. Collateral Type
28. Collateral Worth
29. Commission
30. Compulsory Loan - does not exist
31. Cost Centers
32. Credit Bureau Standard - working on it
33. Credit Officer (same as Loan Officer and Field Officer)
34. Current Outstanding portfolio
35. Data Backups (full vs. incremental)
36. Data Consolidation Reporting Module?
37. DataStandards
38. Day Closing Activities
39. Deliquent Loans
40. Deposit Accounts
41. Depreciation of collaterals
42. Disbursement
43. Disbursement Schedule
44. Dormant Accounts
45. Dues
46. Emergency Fund Product Microfinance term
47. End of Period Closing
48. End-of-Day Processing
49. External Interfaces
50. Fee
51. Field Office
52. Field Office Supervisor
53. Field Officer
54. Field Operations
55. Financial Calendar (days in a year for interest calculations )
56. Financial Instruments
57. Financial Products and Terms
58. Financial Services - insurance, loans, savings, etc
59. Firewall - tech
60. Grace Period - no interest or no payment or both
61. Grameen Style of Micro Finance Operation
62. Group
63. Group Accounts
64. Group Loan Application
65. Group Maturity Level
66. Group Meeting Schedule
67. Group Membership
68. Group Representative
69. Group Savings Account
70. Group Solidarity Lending - group of people 'co-guarantee' in some way
71. Head Office
72. Head Office Accountant
73. Head Office Manager
74. Head Office Super Manager
75. Head Office Supervisor
76. IFX/OFX - international financial exchange standards
77. Impact Assessment
78. Impact Assessment Tools
79. Index of good standing to poor standing summary
80. Indicators (for Impact Assessments)
81. Insurance
82. Interest Accruals
83. Interest Payable
84. Interest rate methods (flat, variable, flexible? Tiered? )
85. Interest rate type
86. Interest Scheme
87. Internationalization (I18N^?) : I18N^? is an industry standard abbreviation for 1 Internationalization (because there are 18 letters between the ‘I’ and the ‘n’).
88. Liability of Savings - accounting (savings are considered liabilities on the balance sheet)
89. Loan
90. Loan Cycle how many loans have come before this one for this customer
91. Loan Loss Provision - accounting
92. Loan Officer -
93. Loan Segment (levels or tiers)
94. Loans Receivable - accounting and banking
95. Localization (L10N^?) - tech
96. Mandatory Savings Account
97. Microfinance Institutions - see MicroFinance
98. Micro Finance Offices
99. Network Aggregator - mifos term
100. Network Manager - mifos term
101. Network Manager - mifos term
102. Opening Balance - accounting
103. Order of payment Application - what comes first: interest, fees, principle from an incomplete payment
104. Penalties (several types, list and define)
105. Periodicity of calculations
106. Portfolio Account Tool - mifos term
107. Portfolio Aggregator - mifos term
108. Portfolio Manager - mifos term
109. Poverty Metrics measures used for targetting loans and other products
110. Pre-paid loans - paid in advance
111. Principle - banking
112. Product Account Code - accounting
113. Promisory note - banking
114. RDBMS - relational database management system
115. Receipt - accounting
116. Region - organizational service area
117. Re-payment schedule
118. Report Generator - mifos term
119. Roles - tech
120. Savings Account (or Deposit Accounts)
121. Scheduled Payments
122. Secured lines of credit
123. Security Levels
124. Setup Analyzer / Manager - mifos term
125. SHG Style of Micro Finance Operation- self help groups are found in India, and use different methodologies for loan disbursement, collection, and use of savings.
126. Source of Funds - accounting
127. Source of Funds Type - accounting
128. Standard interest rate
129. Sub-Ledger Accounting
130. System Administrator / MIS
131. System Parameters Audit Trail
132. System Security Administrator
133. Teller
134. Teller Loans - distinguished from field issued loans
135. Third-Party Accounting Systems
136. Total Revenues
137. Transaction Date
138. Transaction Entry Date
139. Transaction Medium
140. Transactions (obviously there are different types, please explain all types)
141. Two-stage processing (propose and confirm)
142. User Level Access Rights: Certain users have access to
143. VCN (Citrix products) - IT sector term used to denote remote connections for virtual connections
144. Village Bank - another methodology. FINCA, a microfinance network, uses the Village Bank model
145. Voucher - a receipt in some case, sometimes bank issued for redemption elsewhere
146. Write-off Loans - accounting term
147. Share (or Stock)
148. User: People who have permission to access Mifos product and work for a particular MFI. Each one must below to a Work Group and have a username and password to enter to the application. For many transactions, changes to client and account information, and system parameters changes, the user that makes the changes is recorded for audit purposes.

-- JamesDailey - 07 Jan 2005