Take Home Final Dev572 Fall07

Take Home Final Exam DEV 572 Fall 07 (Due by 15th December , e-mail submission) For the first two questions please use the attached financial statement: 1. How do the loan loss provision expense and loan loss reserve relate to each other, and where do you find each in an MFI’s financial statements? The financial statements on the following pages are from an MFI that started operations in 1999. Assume that no loans have been written off. Fill in the missing numbers in the areas shaded in gray. How much is the net outstanding portfolio at the end of December 2001? How much has it increased since December 2000? How much have total operating expenses increased over the same period? 2. Equity provides an important source of capital for the growth and sustainability of an MFI, as you haveseen in this lesson. Many factors effect an institution’s equity. Take the example of the MFI whosefinancial statements you just completed. What happens to the Net Operating Profit (Loss) of this MFI?Where does it appear on the institution’s Balance Sheet? If the MFI’s operations continue to generatethis return, what would happen to the institution’s equity? Is it important for an MFI to generate a netoperating profit in the long run? If so, why? If not, why not? 3. The Local Government Agency (LGA) is your donor agency’s partner in a local area development scheme. LGA wants to start up a microfinance project in the area. The area is isolated and there are few potential clients with year round economic activities. Several best-practice MFIs that work in the area have difficulty keeping their branches open due to lack of demand. LGA, the partner, states that the reason there is no demand for the MFIs’ services is that the interest rate is too high. Further, they state that neither of the MFIs lends to the people in the development area villages. LGA requests a revolving loan fund that will be managed by the village development committee that is made up of elected officials. Your agency is considering approval of this project, but asks your advice on the likelihood that this initiative would become sustainable. What type of information would help you explain your position? 4. Your donor agency has identified seven microfinance institutions that request technical assistance and grant funding for loan capital. Five of the MFIs have been operating for over five-10 years, have a limited outreach – fewer than 2,000 clients and have weak operation systems. There are also two MFIs that appear to have the capability to grow, become sustainable and become significant providers of financial services in their market over the next three years. They are committed to the principles of deep outreach and achieving financial sustainability, and have developed systems, products and service delivery methodologies that appear to create a solid base for future growth. There are funds available to finance only four MFIs. Your donor agency wants to support the five older, weaker MFIs based on the argument that they are in more need of technical assistance and financial

support. Because of limited financing your donor agency recommends that the grant funding for loan capital be extended to all of the MFIs as loans rather than grants, through a government on-lending institution. The government on-lending institution notes that it will have to lower its minimal performance criteria in order to extend loans to these MFIs. But, because of political pressure by your donor agency and others in the government, the on-lending institution will reluctantly support this new effort. What is the likelihood that all of these MFIs will become sustainable? What questionable donor practices can you identify in this case?