Kiva Fellows Program Pre-training Microfinance Course

The statement "For the borrower, accessing financial services has no other costs than the interest rate on the loan" is false. While the interest rate is a significant cost for borrowers, accessing financial services often involves additional fees and charges. These can include origination fees, application fees, late payment fees, and prepayment penalties, among others. These costs can vary depending on the lender and the type of financial service being accessed. Therefore, borrowers should consider these additional costs along with the interest rate when evaluating the affordability of a loan or financial service.

Effective disclosure on financial statements should include information about loan portfolio quality, which helps investors and stakeholders assess the risk associated with the loans held by the company. The methods used to report aging of loans and write-offs for bad debt are important to understand the company's approach to managing credit risk. Subsidies, whether in the form of cash, in-kind, or soft loans, should also be disclosed as they can have a significant impact on the company's financial position and performance. Therefore, all of the above options should be included in effective disclosure on financial statements.

If a country's banking regulations require that interest is considered earned on interest, MFIs should calculate the Effective Interest Rate (EIR). The EIR takes into account the compounding effect of earning interest on interest, providing a more accurate measure of the true cost of borrowing or the true return on savings. The Annual Percentage Rate (APR) does not consider the compounding effect and may not accurately reflect the actual cost or return. Therefore, the EIR is the appropriate rate to calculate in this scenario.

An MFI's largest income-generating activity is its loan portfolio. This means that the majority of the MFI's income comes from the interest and fees charged on the loans it provides to borrowers. The MFI earns money by lending funds to individuals or businesses and charging interest on those loans. The larger the loan portfolio, the more income the MFI can generate from interest payments, making it a crucial source of revenue for the organization.

MFIs (Microfinance Institutions) often choose to partner with various entities such as commercial banks, international NGOs, bilateral and multilateral donor agencies, and government agencies. These partnerships can provide MFIs with access to financial resources, technical expertise, and networks that can support their operations and expand their outreach. Collaborating with these organizations can also help MFIs in leveraging their strengths and resources to better serve their target populations and achieve their social and financial inclusion objectives.

Delinquent loans should not be written off as soon as possible. Writing off a loan means that the lender is acknowledging that the loan will not be repaid and removing it from their books as a loss. However, before writing off a loan, lenders typically go through a process of attempting to collect the debt through various means such as negotiations, restructuring, or legal actions. Writing off a loan should be the last resort after all efforts to recover the debt have been exhausted.

Savings can help borrowers manage risks by providing a safety net to cover costs in emergency situations. Having savings allows borrowers to have a financial cushion to rely on when unexpected expenses arise, such as medical emergencies or job loss. This safety net helps borrowers avoid going into debt or relying on high-interest loans during times of financial hardship. By having savings, borrowers can better navigate unforeseen circumstances and maintain their financial stability.

Microfinance is not a useful tool for the extremely poor or destitute because they often lack the capacity to repay a loan. The extremely poor may not have a stable source of income or any means to generate income, making it difficult for them to repay the loan. Additionally, they may lack the financial literacy and skills necessary to manage the funds from a loan effectively. Therefore, microfinance is not a practical solution for the extremely poor as they are unlikely to benefit from it and may end up in further financial distress.

PAR stands for Portfolio at Risk. This term is commonly used in financial institutions to assess the level of risk associated with a portfolio of loans or investments. It measures the percentage of the portfolio that is at risk of default or experiencing arrears. By calculating PAR, financial institutions can evaluate the health of their portfolios and make informed decisions regarding risk management and mitigation strategies.

A person who works for an hourly wage on a farm may not be a good candidate for credit because they do not have a steady source of income or assets to use as collateral for the loan. Without a stable income or assets, it may be difficult for this person to repay the loan, making them a higher risk for lenders.

Financial intermediaries are beneficial to both borrowers and savers because they decrease the costs for both. By acting as intermediaries, they are able to pool funds from savers and provide loans to borrowers at lower interest rates. This reduces the borrowing costs for individuals and businesses, making it easier for them to access capital. At the same time, savers benefit from higher returns on their investments compared to keeping their money in low-yield savings accounts. Overall, financial intermediaries help to facilitate efficient allocation of funds in the economy and promote economic growth.

Strategic cost control implementation is within the control of an MFI's strategic plan. This means that the MFI can actively plan and execute strategies to control costs in order to achieve their financial goals. They can identify areas where costs can be reduced or optimized, implement efficient processes, and monitor expenses to ensure they are in line with the organization's strategic objectives. By having control over cost control implementation, an MFI can improve its financial performance and sustainability.

Forced savings can occur when individuals are required to set aside a certain amount of money as collateral for a loan. This ensures that they have a financial stake in the loan and are motivated to repay it. By creating collateral, lenders can mitigate the risk of default and protect their investment. This practice is common in various lending situations, such as mortgages or car loans, where the borrower's property or asset serves as security for the loan.

ROSCAs, or Rotating Savings and Credit Associations, are informal financial groups where members contribute a fixed amount of money regularly, and each member takes turns receiving the pooled funds. This system allows individuals to save money and access credit without relying on traditional banking institutions. It is a common practice in many cultures around the world and serves as a way to support community members in meeting their financial needs.

The equation Assets + Liabilities = Equity is not correct. The correct equation is Assets = Liabilities + Equity. This equation represents the fundamental accounting equation, which states that the total value of a company's assets is equal to the sum of its liabilities and equity.

Prudential regulation is a set of rules and guidelines that aim to ensure the stability and soundness of financial institutions. It typically involves detailed standards that institutions must adhere to, enforcement mechanisms to ensure compliance, and a highly capable central financial authority to oversee and regulate the industry. However, informal guidelines are not characteristic of prudential regulation as they lack the specificity and enforceability of detailed standards. Informal guidelines may provide general guidance but do not carry the same level of regulatory oversight as formal standards.

Donated office party supplies would probably not appear when adjusting the financial statements on an MFI's self-sufficiency because they are not directly related to the MFI's operations or mission. While subsidized rent, technical assistance, and donated office supplies can be considered as in-kind donations that support the MFI's core activities, office party supplies are more likely to be classified as non-essential or peripheral expenses. Therefore, they may not be included in the calculation of self-sufficiency, which focuses on the MFI's ability to cover its core operating costs.

The given equation calculates the client retention rate, which is the ratio of the number of follow-on loans made during a lending cycle to the total number of loans paid off during the cycle. This rate indicates the percentage of clients who continue to borrow from the lender after repaying their previous loans. Therefore, the correct answer is client retention rate.

In a low inflationary environment, the real interest rates should be calculated using the formula: periodic rate - inflation rate = real rate. This formula takes into account the difference between the periodic rate (the interest rate charged by the lender) and the inflation rate (the rate at which prices are increasing). By subtracting the inflation rate from the periodic rate, we can determine the real rate, which represents the true return on investment adjusted for inflation. This formula is applicable in a low inflationary environment as it helps to accurately assess the impact of inflation on the real interest rates.

An MFI's loan portfolio size increases when new loans are disbursed. This means that the MFI is providing additional loans to borrowers, which adds to the overall size of their loan portfolio. Repayments on existing loans and writing off delinquent loans may affect the composition of the portfolio, but they do not directly contribute to its increase in size.

Higher interest rates are not useful in limiting the risk of default to an organization and overcoming credit market information problems. While higher interest rates may incentivize borrowers to repay their loans on time, they do not address the underlying issues of credit market information problems and may even exacerbate them. Informal collateral with great intangible value, peer pressure in solidarity groups or the local community, and forced savings deposits are all measures that can help mitigate the risk of default and improve credit market information.

Exchanging customer information with other MFIs in the area is not considered an effective aspect of MFI operating methodologies. This is because customer information is confidential and should be protected. Sharing this information with other MFIs may violate privacy rights and compromise the trust between the MFI and its customers. Effective MFI operating methodologies focus on adhering to basic microlending principles, adapting to fit customers' preferences, and being suited to the capabilities of the institution managing the products and services.

A successful planning process for an MFI requires the participation of staff from all areas of operations to ensure comprehensive input and perspectives. It also requires several years' worth of performance data to analyze trends and make informed decisions. Additionally, the identification of key variables behind financial performance is crucial for effective planning. However, making assumptions based on individual experiences is not a reliable or objective approach to planning, as it may lack a broader understanding of the organization's operations and industry dynamics.

In order to appraise an MFI's operations, a funding agency may examine institutional factors such as human resources, existing partnerships, and MFI leadership. However, office location is not considered as an institutional factor to assess the MFI's operations. The location of the office may have some importance in terms of accessibility for clients, but it is not directly related to the overall performance and effectiveness of the MFI's operations.

The term leverage in microfinance refers to an MFI's ratio of debt to equity. This means it measures the amount of debt the MFI has compared to its equity. The correct answer states that it is not always good for an MFI to be highly leveraged. This means that having a high ratio of debt to equity can be detrimental for an MFI. It suggests that having too much debt can increase financial risk and potentially lead to financial instability for the MFI. Therefore, it is important for an MFI to maintain a balanced ratio of debt to equity to ensure financial sustainability.

A significant repayment problem can lead to a "run on the institution" for an MFI. This means that borrowers may start withdrawing their funds or defaulting on their loans, causing a loss of confidence in the institution. This can result in a domino effect where more borrowers withdraw their funds, leading to a liquidity crisis for the MFI. Ultimately, this can lead to the collapse of the institution if it is unable to meet its financial obligations.

The costs of present and future loans include operational expenses, inflation rates, and interest paid on deposits. However, revenues generated outside the loan portfolio are not considered as costs for present and future loans. These revenues are generated from sources other than the loan portfolio and do not directly impact the costs associated with the loans.

Historic repayment rates may not always reflect the current or future performance of a portfolio. While they provide some indication of past borrower behavior and the ability to repay loans, they do not consider changes in economic conditions, borrower circumstances, or the overall credit environment. Therefore, relying solely on historic repayment rates may not provide a complete and accurate measure of portfolio quality.

Financial viability is not a sufficient condition for accessing commercial capital. While financial viability is an important factor in determining whether a business is eligible for commercial capital, it is not the only factor. Lenders and investors also consider other factors such as the creditworthiness of the borrower, the business's track record, market conditions, and the potential for growth and profitability. Therefore, even if a business is financially viable, it may still be denied access to commercial capital if it does not meet other criteria.

A restructured loan refers to a loan for which the payment terms and interest rate have been renegotiated. This means that the original terms of the loan have been modified, typically due to financial difficulties faced by the borrower. The lender and borrower come to an agreement to adjust the payment schedule and interest rate in order to make it more manageable for the borrower to repay the loan. This can involve extending the loan term, reducing the interest rate, or changing the payment amount.

All of the options listed (repayment intervals, forced savings, and grace periods) are commonly included as terms of a loan. Therefore, "None of the above" would be the correct answer as it implies that all of the options would be included as terms of a loan.

Interest rate caps do not increase vulnerable populations' access to credit. In fact, they can have the opposite effect. When interest rates are capped, lenders may be less willing to provide loans to individuals with lower credit scores or higher risk profiles, as they cannot charge higher interest rates to compensate for the risk. This can result in reduced access to credit for vulnerable populations who may already have limited options for borrowing.

Operational self-sufficiency is a tool that relies on amounts drawn only from the Income Statement. This tool measures the ability of a business to cover its operating expenses solely through its operating revenues. It indicates the efficiency and profitability of a company's core operations by comparing the operating income to the operating expenses. Therefore, operational self-sufficiency is directly related to the Income Statement and does not consider any other financial statements or sources of funds.

Deep financial policies can result in sustained growth of financial assets in comparison to growth in national income. This means that the value of financial assets, such as stocks, bonds, and other investments, is increasing at a faster rate than the overall income of a country. This can be a result of various factors, such as favorable monetary policies, economic growth, and increased investor confidence. This sustained growth of financial assets can have both positive and negative effects on the economy, depending on how it is managed and distributed among different sectors of society.

An MFI seeking institutional viability would not seek a rise in operational efficiency. This is because operational efficiency refers to the ability to minimize costs and maximize output, which is crucial for the sustainability and profitability of the institution. Therefore, it is important for an MFI to focus on improving operational efficiency to achieve institutional viability.

Internal control systems are designed to safeguard a company's assets, ensure accurate financial reporting, and promote operational efficiency. They aim to prevent and detect errors, fraud, and non-compliance with laws and regulations. Inefficiency refers to the lack of effectiveness or productivity in business operations, which can be addressed and improved through internal controls. Therefore, internal control systems do not protect against inefficiency, making it the exception in this case.

The correct answer is operating income / total operating expenses, less cash cost of funds. This formula is used to calculate the operational self-sufficiency of an MFI (Microfinance Institution) that offers voluntary deposit taking. Operational self-sufficiency is a measure of the institution's ability to cover its operating expenses and generate income. By subtracting the cash cost of funds from the total operating expenses, the formula takes into account the cost of borrowing funds and provides a more accurate measure of the institution's financial sustainability.

The ratio of Number of active clients to Number of loan officers is appropriate for an institution's internal analysis because it provides insight into the efficiency and productivity of the loan officers in serving the clients. A higher ratio indicates that each loan officer is handling a larger number of clients, which can suggest better utilization of resources and potentially higher profitability for the institution.