Glossary of Microfinance Terms & Acronyms

Ability to Repay - Borrower's ability to make timely loan payments as required, both short-term and long-term. Projected ability to repay is based on factors such as income, existing debt, and the length of the loan period. Legitimate lenders assess the ability of borrowers to repay their loans; predatory lenders often do not.

Access to Financial Services - Percentage of the adult population with access to an account with a financial intermediary

Accumulating Savings and Credit Associations (ASCAs) - Informal savings groups that resemble ROSCAs but are slightly more complex. In an ASCA, all members regularly save the same fixed amount while some participants borrow from the group. Interest is usually charged on loans. ASCAs require bookkeeping because the members do not all transact in the same way. Some members borrow while others are savers only, and borrowers may borrow different amounts on different dates for different periods. If members pay interest on their loans, the return to savings has to be individually calculated and fairly shared among the group.

Active Clients (Credit products) - Number of clients with loans outstanding on any given date. An institution's official statistics on active clients are usually recorded as the number of clients with loans outstanding on the date its financial statements are filed.

Active Loan Portfolio - Total amount loaned out less the total amount of repaid loans on the date the report is filed.

Adjusted Return on Assets (AROA) - How productively the MFI has employed its assets. Reflects the MFI's real unsubsidized operating profitability relative to its earnings base. Formula: Adjusted Operating Profit/ Average Total Assets

Adjusted Return on Equity (AROE) - Return on the capital of the MFI. Formula: Adjusted Operating Profit/Average Equity

Administrative Efficiency Ratio - Measurement of the overall operating efficiency of an MFI. Useful in comparing various MFIs, because it does not include the cost of funds and does not penalize institutions that are accessing commercial sources. Formula: (Personnel + Other Administrative Expenses + In-kind Donations) / Average Net Portfolio Outstanding

Aging of Arrears - Categorizing loan amounts past due according to the amount of time the amounts are past due. Aging categories are often 30 day increments such as 1-30 days past due, 31-60 days past due, 61-90 days past due, and greater than 90 days past due.

Amortization - Gradual repayment of a loan by making regular payments over time. To be fully amortizing, payments must cover both the principal amount and interest due on the loan for the given period. An amortization schedule is an established timetable for making payments.

Annual Percentage Rate (APR) - Percentage of a loan's principal that would be paid in finance charges if the loan were carried for one year. APR includes both interest costs and fees charged on a loan. When lenders disclose the APR of loans, borrowers can better understand the cost of the credit.

Appreciation - Increase in the value of a financial instrument or currency as a result of market forces of supply and demand.

Arrears Rate - Measures the amount past due in a portfolio. Formula: Amount Past Due / Outstanding Portfolio. Under-estimates the level of risk in the portfolio. See Portfolio at Risk.

Assessment - Also called evaluation. Assessments include instrumental appraisals, rating exercises and other activities that may determine how well an institution performs financially, operationally and managerially.

Asset Liability Management (ALM) - Process of planning, monitoring and controlling asset and liability volumes, maturities, rates and yields, with a goal of minimizing interest rate risk while still earning sufficient profits. ALM is more important and complex for institutions engaged in financial intermediation (offering both loans and deposits) because interest rate risk tends to be higher than for institutions engaged solely in credit or savings. For example, if a financial institution’s competitors raise interest rates offered on time deposits, the institution will likely have to follow suit to ensure that time deposit holders will not move their deposits to higher paying competitors upon maturity. To increase the interest rate paid out (thus securing a source of funding) and still maintain the same level of profitability, the institution must simultaneously charge a higher rate of interest on a similar volume of loans. This process of matching is a key component of asset liability management.

Average Loan Balance per Borrower - Gross Loan Portfolio / Number of Active Borrowers

Average Loan Balance per Borrower/ GNI per Capita (%) - Average Loan Balance per Borrower/ GNI per capita

Average Portfolio - Used for calculations that require a comparison of assets to income. Formulas: 1. Most accurate: (Portfolio Outstanding at the End of Each Month in the Period + Portfolio at the End of the Previous Period) / (1 + Number of Months in the Period) 2. Less accurate: (Portfolio Outstanding at the End of the Previous Period + Portfolio Outstanding at the End of Current Period) / 2

Average Savings Balance per Saver - Voluntary Savings/ Number of Voluntary Savers

Average Savings Balance per Saver/ GNI per Capita (%) - Average Savings Balance per Saver/ GNI per capita

Bad Debt - Debt that is not collectible and is therefore worthless to the creditor

Balance Sheet - Financial statement presenting measures of the assets, liabilities and owner's equity or net worth of business firm or nonprofit organization as of a specific moment in time.

Bank - Licensed financial intermediary regulated by a state banking supervisory agency. It may provide various financial services, including deposit taking, lending, payment services, insurance and money transfers.

Base of the Pyramid - Reference to the vast proportion of the world's population that lives under the poverty threshold and whose marketing potential has generally been ignored by the formal marketplace.

Basis Points; Points and Fees - Costs to borrowers that are not directly reflected in interest rates. "Points" or "discount points" are fees calculated as a percentage of the loan principal; one point equals one percent of the principal. Fees may include compensation to a broker, charges by the lender and third-party charges for appraisals, title insurance, etc. High points and fees are frequently the hallmark of a predatory loan, and they can disguise the real cost of credit when they are financed rather than paid outright at a loan closing.

Benchmarking - Puts performance measurements in context by comparing an institution with similar institutions based on a common factor, such as region, size or methodology. A benchmark can also refer to the standard against which all similar institutions are compared.

Blended Value Proposition - Concept that the value generated by an organization (whether for-profit or non-profit) is financial, social and environmental, and that these three constituents of value are indivisible from one another and must be taken into account when assessing value creation through investment.

Bridge Loan - Short-term loan to provide temporary financing until more permanent financing is available.

Business Development Services - Support services that contribute to the growth of enterprises (e.g. business planning, client training, networking, marketing and technical support).

Business Plan - Document that describes an organization's current status and plans for several years into the future. It generally projects opportunities and maps the financial, operations, marketing and organizational strategies that will enable the organization to achieve its goals. A good plan incorporates financial models that allow managers to evaluate the financial implications of their decisions and of changing conditions.

Capital - Broadly, all the money and other property of an enterprise used in transacting its business.

Capital / Asset Ratio - Total Equity/ Total Assets

Capital Adequacy - Quantitative and qualitative measure of an institution's level of equity versus the risk it incurs. It indicates the ability to absorb losses.

Capital Markets - System for trading long-term debt instruments (those that mature in more than one year).

Carrying Charge; Finance Ccharge - Fee charged for receiving credit, usually in the form of interest.

Client Graduation - Progression of a microenterprise to a small- or medium-size enterprise and financial sustainability.

Client Load - Average number of clients served by one loan officer. Formula: average number of active loan clients during the period / the average number of loan officers during the period.

Collateral - Item of value that a lender can take as compensation if a borrower fails to repay a loan. Borrowers generally are required to secure a loan with personal property as collateral. On mortgage loans, the property serves as collateral. For microloans, collateral can vary from fixed assets (a sewing machine) to cross-guarantees from peers.

Commercialization - MFI's application of market-based business principles, usually associated with its evolution away from donor or subsidized funding toward capital markets debt and equity, in order to attain financial self-sufficiency.

Commission - One-time fee, usually a percentage of the loan amount that is charged at the time of disbursement; it increases the effective interest rate of a loan.

Community-based Finance Institution (CBFI) - Organizations, such as co-operatives, that enable low-income groups to participate fully and democratically in the development process and that have their roots in the community.

Compensating Balance - Requirement that a borrower maintain a minimum amount in a savings account in order to receive a loan.

Compulsory or Mandatory Savings - Deposits required as part of loan terms or for membership, usually by a credit union, cooperative, MFI, village bank or savings group. Compulsory savings often substitute for collateral. The amount, timing and access for deposits are determined by the institution, not the client. Deposits may be required weekly or monthly, before or at loan disbursement, or at each loan installment payment. Clients may withdraw savings at the end of the loan term, a set number of weeks or months, or when they terminate their membership.

Contractual or Programmed Savings - Savings in which the client commits to regularly depositing a fixed amount for a specified period of time to reach a pre-determined goal. Early withdrawal is prohibited or penalized. Contractual products help depositors accumulate funds to meet specific expected needs, such as expenses associated with school, a festival, a new business, an equipment purchase or a new house. They also help financial institutions better predict the volume and timing of deposits and withdrawals.

Co-operative - Association of persons, usually of limited means, who have voluntarily joined together to achieve a common economic end through the formation of a democratically controlled business organization, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking.

Cost per Borrower - Operating Expense/ Period Average Number of Active Borrowers

Cost to Register a Business (% of GNI per capita) - Total cost involved in fulfilling all procedures necessary to start a business, expressed as a percentage of country's GNI per capita.

Counter-cyclical - The term used in economics to describe an element that moves in the opposite direction to the overall economy. In previous financial crises, microfinance has fared far better than other banks whose business was more closely tied to mainstream domestic and international markets.  This time, however, since many MFIs are more connected to the markets than before, the impact on the microfinance industry will likely be greater.  Institutions that depend heavily on cross-border borrowing instead of deposits to finance loan portfolios are likely to feel the liquidity squeeze most sharply, however impact will vary from country to country.

Covenant - Agreement or promise to do or not to do a particular thing, usually incidental to a contract. The goals of covenants include: full disclosure of information, preservation of net worth, maintenance of asset quality, maintenance of adequate cash flow, control of growth, control of management, assurance of legal existence and continuity and provision for lender profit.

Credit Bureau - Agency that compiles information on the credit history of consumers so that creditors can make lending decisions.

Credit Crisis or Credit Crunch - A sudden reduction in the general availability of loans (or credit), or a sudden increase in the cost of obtaining loans from banks. As a result of an increased perception of risk, microfinance institutions may find the costs of loans increasing.

Credit Enhancement - Component of a loan that improves borrower or transaction creditworthiness, such as a Standby Letter of Credit (SBLC), a reserve account or cash over-collateralization.

Credit History - Borrower's record of debts and whether payments were timely. Lenders examine a borrower's credit history to help determine loan eligibility and the terms of the loan.

Credit Insurance - Instrument designed to pay off a borrower's debt if the borrower dies or is otherwise incapable of meeting the loan obligation. Premiums may be added to the loan balance, increasing the overall cost by requiring the borrower to pay interest on the premiums over the life of the loan.

Credit Rating - Evaluation of the ability to repay obligations.

Credit rating/score - Calculation that rates a borrower's credit record, based on a number of factors including how well debts have been paid off, current levels of debt, types of credit and length of credit history. Lenders use credit scores to decide who qualifies for a loan and how much the loan should cost.

Credit Scoring - Automated system that assigns points for various credit factors, providing lenders with the ability to grade prospective clients and calculate the risk of extending credit. In microfinance, the methodology takes into account a microentrepreneur's experience, character and capacity to repay. The final credit score is an overall measure of creditworthiness.

Credit Union - Nonprofit, cooperative financial institution owned and run by its members, who pool their funds to make loans to one another. Most credit unions are organized to serve individuals in a particular community, group, organization or association.

Currency Swap - Agreement between two parties to exchange principal and interest payments between two different currencies over a given period of time. Cross currency swaps enable an MFI to create synthetic local currency financing from US dollar or euro sources of funding.

Debt - Term for bonds, notes, mortgages and other forms of paper evidencing amounts owed and payable on specified dates or on demand.

Debt/Equity Ratio - Total Liabilities/Total Equity

Debt Ratio - Calculation that measures how much debt borrowers carry compared to their income, a key factor in determining whether a borrower qualifies for a loan. Higher ratios generally indicate a greater risk of default.

Declining Balance Interest Rate - Calculated based on the loan principal amount actually in the hands of the borrower during each amortization period.

De-coupling - China and the world's other large emerging markets were until recently widely considered to be immune to the travails of the economic superpowers, and “decoupled” from their paths. That has changed. As western stock markets have crumbled, stock markets have plunged in emerging economies such as China, South Africa and Brazil, and many currencies have fallen sharply.

Default - Failure to make timely payment of interest or principal on a loan, or to otherwise comply with the terms of a loan.

Delinquency - the situation that occurs when loan payments are past due. A delinquent loan (or loan in arrears) is a loan on which payments are past due. Delinquency is also referred to as arrears or late payments.

Deliverable - Deliverable means that a local currency can be physically delivered in the local currency market to complete a predetermined agreement to exchange foreign and local currency.

Demand / Sight Deposit - Fully liquid accounts in which the saver may deposit and withdraw any amount at any time with no advance commitment. The saver must maintain a minimum required balance. Demand deposit transactions (deposits, withdrawals, transfers/payments) may be made using passbooks, debit cards and ATMs and/or POS devices, and, in current accounts, checks. If clients overdraw their demand deposit accounts, financial institutions generally charge penalties and/or high levels of interest if they do not reject the payment outright.

Deposit Insurance - Insurance to reimburse depositors for the loss of their deposits in the event that their financial institution fails. Deposit insurance is typically provided by government as an adjunct to regulation and supervision. It may also be required by regulation but provided by private insurers. Deposit insurance does carry a risk: by assuring that depositors will not lose their savings if a bank goes under, it can 1) undermine depositors’ motivation to oversee the institutions in which they deposit and 2) encourage managers to take on more risk than they otherwise would if the deposits were not insured.

Deposit interest rate (%) - Deposit interest rate is the rate paid by commercial or similar banks for demand, time, or savings deposits.

Deposit Rates - Usually refers to rates offered to resident customers for demand, time, or savings deposits. Often, rates for time ands savings deposits are classified according to maturity and amounts deposited. In addition, deposit money banks and similar deposit-taking institutions may offer short-and medium terms instruments a specified rates for specific amounts and maturities; these are frequently termed “certificates of deposit”

Deposits to Loans - Voluntary Savings/ Gross Loan Portfolio

Deposits to Total Assets - Voluntary Savings/ Total Assets

Depreciation - Depreciation is a decline in the value of a currency in comparison with a reference currency (e.g., the US dollar).

Derivative - A derivative is a security, such as an option or futures contract, whose value depends on the performance of an underlying security or asset. Futures contracts, forward contracts, options, and swaps are the most common types of derivatives. Derivatives are generally used by institutional investors to hedge some aspect of portfolio risk.

Devaluation - Devaluation is a fall in the value of a currency against other currencies. Strictly, devaluation refers only to sharp falls in a currency within a fixed exchange rate system. In contrast to depreciation, devaluation implies an official lowering of the value of a country’s currency by a monetary authority which formally sets a new fixed rate.

Development Bank - Generally country-owned and state-based, these banks offered agricultural credit originally and have moved to offer microfinancial services.

Development Finance - Term that encompasses all financial services provided to low-income clientele in less developed countries - including microloans, microsavings, microinsurance, etc.

Disbursement - The actual transfer of financial resources. The disbursement of a microloan reflects the transfer of the loan amount from the lending institution to the borrower.

Disclosure - The Truth-in-Lending Act (TILA) requires accurate, uniform disclosure of annual percentage interest rates and other consumer credit loan terms. The Federal Reserve Board has exempted overdraft loans from TILA's disclosure requirements, allowing banks to charge high interest rates for overdraft loans while masking the cost.

Discounting - the process of deducting interest, commissions or fees from the initial loan amount before the loan is disbursed. Discounting reduces the initial loan amount actually received and therefore increases the effective interest rate.

Discount Rate - Discount rate/bank rate (60) is the rate at which the central banks lend or discount eligible paper for deposit money banks, typically shown on an end-of-period basis. The Eurosystem marginal lending facility rate (60) is the interest rate at which other MFIs obtain overnight liquidity from NCBs, against eligible assets.

Diversification - The spreading of risk by putting assets in several categories of investments-stocks, bonds, money market instruments, and precious metals, for instance, or several industries, or a mutual fund, with its broad range of stocks in one portfolio.

Doing Business Rank - Average score of 10 indicators that measure the ease of doing business in a certain country

Donations - Donations received in the financial year to apply towards operation of financial services.

Double bottom line - Term describing the creation of a financial and a social return on an investment.

Due diligence - The process of assessing financial risks involved in an investment before purchasing or funding that investment. Responsible loan purchasers conduct thorough due diligence to avoid funding mortgages or mortgage investments that include predatory mortgages.

Economic Freedom Index - Average score of 10 indicators that measure a country’s level of economic freedom

Effective interest rate - the rate that converts all the borrower's financial costs for a loan into a single declining balance interest calculation. It includes the effects of interest rates, whether they are calculated on a flat or declining basis, payment schedules, commissions, fees, discounting, and compensating balances. The effective rate allows a calculation of all financial charges as a percent of the loan actually held by the client during each payment period. It is the rate that a client actually pays based on the amount of loan proceeds actually in the client's hands.

Equity - In mortgage lending, the market value of a home minus the amount owed on the mortgage. In other words, equity is the portion of a home's value that the homeowner owns free of debt. As a simple example, if a homeowner owes $75,000 on a house that could be sold for $100,000, the homeowner has equity of $25,000. Particularly for lower-wealth families, equity is an important source of savings and credit.

Equity participation - the provision of equity to an institution by donors or investors. Equity participants expect to share in the financial returns of the organization. They are distinct from creditors whose interest, in the form of liabilities, is due regardless of the institution's performance.

Exchange Rates - Price in a given currency at which bills drawn in another currency may be bought. In the MIXMarket Environment section the exchange rates are expressed in time series of national currency units per U.S. Dollar using data from the IFS/IMF. For period average rates the data are based in the monthly average of market rates or of official rates of the reporting country (and principal, secondary or tertiary rates for countries maintaining multiple exchange agreements). These estimates are derived on the basis of a simple average of the end-of-month market rates in the markets of the reporting country.

External Audit - A formal, independent review of an institution's financial statements, records, transactions and operations. External audits are usually performed by professional accountants in order to lend credibility to financial statements and management reports, to ensure accountability for donor funds, or to identify internal weaknesses in an organization. The external audit process is key to transparency.

Fee - a charge, usually a fixed amount independent of the loan size, levied as part of the loan process. Fees increase the effective interest rate of a loan. If the amount is fixed, their impact on the effective interest rate will vary according to the loan size.

Finance charge - A finance charge is the fee charged for receiving credit, usually in the form of interest.

Finance company - A company engaged in making loans to individuals or businesses. Unlike a bank, it does not receive deposits from the public.

Financial Depth - Liquid liabilities (M3) as % of GDP.
Liquid liabilities are also known as broad money, or M3. They are the sum of currency and deposits in the central bank (M0), plus transferable deposits and electronic currency (M1), plus time and savings deposits, foreign currency transferable deposits, certificates of deposit, and securities repurchase agreements (M2), plus travelers checks, foreign currency time deposits, commercial paper, and shares of mutual funds or market funds held by residents.

Financial Expense - All interest, fees and commissions incurred on all liabilities, including deposit accounts of clients held by the MFI, commercial and concessional borrowings, mortgages, and other liabilities.

Financial Intermediation - The process of mobilizing deposits and disbursing them as loans to clients or investing them in other types of financial instruments. Managing financial intermediation is significantly more demanding than managing credit alone. In particular, maintaining the quality of assets is more important in order to protect the value of deposits and managing liquidity, internal controls and assets vis-à-vis liabilities are more challenging.

Financial Management - Financial management is a broad topic in microfinance operation management including interest rate setting, revenue generation, cost analysis, delinquency management, profit centres, credit bureaus and general accounting.

Financial statements - for an MFI, financial statements refer to the three basic financial reports that show the financial position of an MFI. These are the balance sheet, the income statement and the portfolio report. Financial statements also may include a fourth report, the Cash Flow Statement.

Financial Self-Sufficiency (FSS) - Total operating revenues divided by total administrative and financial expenses, adjusted for low-interest loans and inflation. In a microfinance context, an institution is financially self-sufficient when it has enough revenue to pay for all administrative costs, loan losses, potential losses and funds.

Fixed Assets - Long-lived property of a microentrepreneur or firm that is used in that business' production (i.e., a sewing machine is a fixed asset for a microentrepreneur who makes clothing). Fixed-asset lending is a type of microfinance product that disburses loans expressly for the purpose of purchasing these fixed assets, which aid in production volume and income.

Fixed-Asset Lending/ Loan - Microfinance product in which loans are disbursed expressly for the purpose of purchasing fixed assets, which aid in production volume and income.

Flat interest rate - A flat interest rate is an interest rate calculated on the basis of the stated initial principal amount of the loan irrespective of the payment plan, (not on the amount of the loan actually in the hands of the borrower during each amortization period.)

Forward Contract - A forward contract is the purchase or sale of a specific quantity of foreign currency or other financial instrument with payment and delivery at a specified future date. MFIs may use foreign exchange forward contracts to hedge foreign exchange risk.

Fluctuation - Fluctuation is a change in prices or interest rates, either up or down. Fluctuation may refer to either slight or dramatic changes in the prices of stocks, bonds, or commodities.

Foreign Direct Investment, net inflows (% of GDP) - Foreign Direct Investment (FDI) is net direct investment that is made to acquire a lasting management interest (usually 10 percent of voting stock) in an enterprise operating in a country other than that of the investor (defined according to residency). The investor's purpose is to be an effective voice in the management of the enterprise. FDI is the sum of net equity capital, net reinvestment of earnings, net other long-term capital, and net short-term capital as shown in the balance of payments.

Fund Advisor(s) - The company or companies that are given primary responsibility for managing a fund.

Fund Manager - The individual(s) responsible for the overall fund strategy, as well as the buying and selling decisions of the securities in a fund's portfolio. Management teams may consist of many people, but if one manager is considered a central figure or lead manager, that individual's name should be known. Of importance is the year in which the manager began running the fund to determine how much of a fund's performance is attributable to its current management. The term "Multiple Managers" refers to a situation when more than two people are involved in the fund management, and they manage independently. Where this term is used, quite often the fund has divided net assets in set amounts among the individual managers. In most cases, multiple managers are employed at different subadvisors or investment firms.

Fungibility - The quality of money that makes one individual specimen indistinguishable from another. Anything used as money (gold, shells, bank notes) must have this quality. The fungibility of money makes it difficult for lenders to ensure that borrowers use the loan funds in the way lenders wish; one way they try to get round "misuse of funds" is to lend in kind. Often a person will borrow money for one stated purpose, but the effect of the loan is to finance another activity. Say, for example, that I intend to improve my house using savings but someone offers me a home improvement loan on attractive terms. The effect of the loan is not to increase quality of the housing stock, as the lender intended, but to enable me to undertake some other activity I could not otherwise have financed buying a motorcycle, taking a holiday, or perhaps partying every night. Microfinance lenders such as donors and NGOs tend to dislike this because (a) they don't think poor people should use their limited incomes on such things, and (b) it reduces the funds available for lending to other potential clients or beneficiaries.

Futures - Futures are exchange-traded contracts requiring the holder to exchange a specified amount of a currency for another, at a specified price, on a specified future date (i.e., exchange-traded forward contracts). Futures are standardized contracts for a fixed uniform currency amount and set maturity dates throughout the year.

Gross Domestic Product (GDP) -

GDP (current US$) - Gross domestic product (GDP) measures the total output of goods and services for final use occurring within the domestic territory of a given country. Gross domestic product at purchaser values (market prices) is the sum of gross value added by all resident and nonresident producers in the economy plus any taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. The weighting factor, Current US$, is used in the World Development Indicators 2001. Current US$ is based on the World Bank's currency index for the period 1970 to 2010 with the base year 1995.

Generally Accepted Accounting Principles (GAAP) - the set of internationally accepted accounting standards.

General Partner (GP) - An entity that manages a fund or investment vehicle in which there are many other investors.

Gini Index -   Gini index measures the extent to which the distribution of income (or, in some cases, consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution. A Lorenz curve plots the cumulative percentages of total income received against the cumulative number of recipients, starting with the poorest individual or household. The Gini index measures the area between the Lorenz curve and a hypothetical line of absolute equality, expressed as a percentage of the maximum area under the line. Thus a Gini index of zero represents perfect equality, while an index of 100 implies perfect inequality. GNI (gross national product, or GNP, in the 1968 SNA terminology) measures the total domestic and foreign value added claimed by residents. GNI comprises GDP plus net receipts of primary income (compensation of employees and property income) from nonresident sources.

Gross National Income (GNI) -

GNI per capita, Atlas method (current US$) - GNI per capita (formerly GNP per capita) is the gross national income, converted to U.S. dollars using the World Bank Atlas method, divided by the midyear population. GNI is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. GNI, calculated in national currency, is usually converted to U.S. dollars at official exchange rates for comparisons across economies, although an alternative rate is used when the official exchange rate is judged to diverge by an exceptionally large margin from the rate actually applied in international transactions. To smooth fluctuations in prices and exchange rates, a special Atlas method of conversion is used by the World Bank. This applies a conversion factor that averages the exchange rate for a given year and the two preceding years, adjusted for differences in rates of inflation betw

Governance - Process by which a board of directors, through management, guides an institution in fulfilling its corporate mission and protects its assets.

Greenfielding - Greenfield or greenfielding refers to starting a new microfinance organization where none existed before.

Gross Domestic Savings (% of GDP) - Gross Domestic Savings are calculated as the difference between GDP and total consumption. Total consumption expenditures cover the consumption by households and the general government.

Gross Loan Portfolio - All outstanding principal for all outstanding client loans, including current, delinquent and restructured loans, but not loans that have been written off. It does not include interest receivable. It does not include employee loans.

Group Lending - Lending mechanism which allows a group of individuals - often called a solidarity group - to provide collateral or loan guarantee through a group repayment pledge. The incentive to repay the loan is based on peer pressure - if one group member defaults, the other group members make up the payment amount.

Hazard insurance - Insurance that covers property loss or damage, usually paid for by borrowers and required when obtaining a mortgage.

Hedge - A hedge is an investment purchased specifically to reduce (or off-set) the risk of another investment. Hedging is a strategy designed to minimize exposure to an unwanted business risk.

Horizontal growth - growth based on replicating a standardized retail model in new geographic areas. Although horizontal growth has been the norm for MFIs, simple horizontal expansion can make it difficult to quickly introduce new products or changes to products.

Housing Finance - A specialized loan product that allows households of both microentrepreneurs and wage-earners to finance home improvements or additions. Loans tend to be longer-term, and in larger amounts, than traditional microenterprise loans. In the case of microbusiness owners, home improvement loans can enhance at-home businesses.

Income statement - one of a set of financial statements, the income statement shows what the institution earns and spends over a period of time, for example from January 1, 2002 through December 31, 2002. It reports the net income, profit (or net loss). Inflation Adjustment Formula: (Average Equity Average Fixed Assets) x Inflation Rate

Index - A published rate often used to establish the interest rate charged on mortgages or to compare investment returns. Examples of commonly used indexes include Treasury bill rates, the prime rate, LIBOR (the London Interbank Offered Rate), and the 11th District cost-of-funds-index (issued by the San Francisco Federal Home Loan Bank).

Individual Lending - Single-client lending where repayment relies solely on the individual.

Inflation Rate (Changes in Consumer Prices) - Indices shown for Consumer Prices are the most frequently used indicators of inflation and reflect changes in the cost of acquiring a fixed basket of goods and services by the average consumer. The percent changes are calculated from the index number series. Preference is given to series having wider geographical coverage and relating to all income groups, provided they are no less current than more narrowly defined series. The weights are usually derived from household expenditure surveys (which may be conducted infrequently). Other limitations might exist in terms of coverage of commodities for pricing, income groups, or their expenditure in the chosen index. The Laspeyres index formula is the most commonly used to calculate the changes in consumer prices.

Informal Finance System - "Informal" refers to types of institutions. Most community-based financial institutions are formal organizations, although they are not normally targeted for a particular purpose. While every group exhibits some degree of formality, the term "informal" is used principally to describe traditional systems of savings and loans.

Informal Savings - Savings held outside of a formal financial institution. Informal savings mechanisms include saving at home – in cash or kind, savings groups, rotating savings and credit associations (ROSCAs), accumulating credit and savings associations (ASCAs), through reciprocal savings and lending with neighbors or relatives, and with money guards (friends or relatives willing to hold a saver’s money for a period) or informal sector deposit collectors (people who charge a fee to hold a saver’s money for a determined period). Informal savings devices are often highly convenient but may be unreliable, insecure and/or illiquid. A financial institution should have a solid understanding of the local informal savings market before it attempts to develop savings services for poor people.

Informal Sector/ Economy - A subset of the economy consisting of self-owned enterprises and the enterprises of informal employers, in both urban and rural areas. The businesses of the informal sector are not registered with any taxation or regulatory bodies. The main features of the informal sector are ease of entry, self-employment, small-scale production, labor-intensive work, lack of access to organized markets, and lack of access to traditional forms of credit.

Insolvency - Inability to pay one’s debts. Insolvency is often contrasted with illiquidity, which means having insufficient management team assets to cover short term liabilities. Insolvency means having negative net assets; liabilities exceed assets.  Insolvency is not synonymous with bankruptcy, which is a determination of insolvency made by a court of law.

Interest - The fee charged by lenders for extending credit, usually a percentage of the loan amount. Even a small difference in an interest rate can make a big difference in how much a borrower pays over time. Responsible lenders adjust interest rates according to their level of risk in a loan.

Interest Rate Risk - The risk associated with changes in market interest rates that can harm a financial institution’s profitability. A financial institution exposes itself to interest rate risk when it mobilizes deposits at one interest rate and lends them out at another. For example, an increase in market interest rates on deposits might force a financial institution to immediately increase the interest rate it pays on deposits in order to remain competitive and continue to attract deposits. At the same time, if the institution’s earning assets are concentrated in long-term, fixed-rate loans, it does not have the immediate option of increasing the interest rate it charges on these loans. Because the financial institution cannot increase its interest income from loans as fast as its cost of funds is rising, profitability will decrease and it could even face a shortfall in operating funds. Alternatively, if the market interest rate charged on loans drops, a financial institution could be squeezed since it cannot drop the rate it pays out on deposits below zero; in this case, it may be limited to covering costs with fee income. Institutions that have the capacity and regulatory approval to do so lend on a variable rate basis to reduce interest rate risk by adjusting loan rates as deposit rates change.

Interest Rate Spread - The difference between the rate the financial institution pays for deposits and the rate it charges for loans. In a financially sustainable institution, this spread is large enough to cover operating costs, the opportunity cost of holding liquid reserves that earn no or low interest, losses in the value of the institution’s assets due to inflation, the cost of provisions for loan and investment losses and capitalization

Interest rate spread (lending rate minus LIBOR) - Interest rate spread is the interest rate charged by banks on loans to prime customers minus the interest rate paid by commercial or similar banks for demand, time, or savings deposits. The spread over LIBOR (London interbank offered rate) is the interest rate charged by banks on short-term loans in local currency to prime customers minus LIBOR. LIBOR is the most commonly recognized international interest rate and is quoted in several currencies.

Interim Financing - Short-term loan to provide temporary financing until more permanent financing is available.

Intermediaries - Non- or for-profit institutions that have specialized lending capacities. They obtain capital in the form of equity and low interest loans from a variety of sources, including foundations and other funders, to form a "lending pool." They then serve as "wholesalers" who process large numbers of small loans or investments. This "economy of scale" often allows intermediaries to be more efficient than a foundation or funder could be if it considered each investment individually. Also, intermediaries often develop expertise in a particular field or region that foundations or funders cannot afford to develop. In the context of this study, non-financial intermediaries include community foundations and financial intermediaries include credit unions, venture capital and loan funds, banks, etc.

Internal Controls - Policies and procedures designed to minimize and monitor operational risks, in particular the risks of fraud and mismanagement. Because the unpredictable size and timing of cash deposits make financial institutions particularly vulnerable to fraud and errors, institutions that mobilize deposits must implement rigorous internal control policies and procedures. Essential controls include: board approval and monitoring of information; rotation and segregation of duties; dual control of safes and vaults; established limits on cash holdings and expenditures; signature requirements; cash management procedures; daily balancing of cash drawers with the general ledger; receipts for all transactions; restricted access to offices and assets; periodic physical inventory of assets and cash counts; internal operational reports that are timely, easy to understand and concise; accounting that complies with local accounting law and is consistent from one period to the next; sequential numbering of documents; an adequate audit trail; a secure management information system; and periodic reconciliation of the general ledger totals with bank statements or other subsidiary ledgers. Internal controls should be supported by a culture that strongly discourages fraud and mismanagement; documented, clear and concise policies and procedures; job descriptions that clearly allocate responsibilities and accountabilities; transparent accounting practices and an adequate management information system that provides accurate and timely information; effective internal supervision, including routine audits and spot checks; and internal audit functions performed by a qualified individual(s) who reports directly to the board of directors.

Internal Rate of Return (IRR) - The discount rate at which the present value of the future cash flows of an investment equal the cost of the investment. It is found by a process of trial and error; when the net present values of cash outflows (the cost of the investment) and cash inflows (returns on the investment) equal zero, the rate of discount being used is the IRR. When IRR is greater than the required return-called the hurdle rate in capital budgeting-the investment is acceptable.

Investment - The use of capital to create more money, either through income-producing vehicles or through more risk-oriented ventures designed to result in capital gains. Investment can refer to a financial investment (where an investor puts money into a vehicle) or to an investment of effort and time on the part of an individual who wants to reap profits from the success of his or her labor.

Lending Rate - Lending Rate is the bank rate that usually meets the short and medium term financing needs of the private sector. This rate is normally differentiated according to creditworthiness of borrowers and objectives of financing.

Leverage, or Gearing - Borrowing money to reinvest in an attempt to increase the returns to equity. Leverage allows greater potential returns to the investor when cost of borrowing is less than returns on investment. The potential for loss is also greater, because if the investment becomes worthless, the loan principal and all accrued interest on the loan still need to be repaid. Deleveraging is the action of reducing borrowings.

Liabilities, Total Liabilities - Total value of financial claims on a firm's assets. Equals total assets minus net worth.

Limited Liability - Limitation of shareholders' losses to the amount invested.

Limited Partner (LP) - An investor who invests in an investment vehicle rather than investing directly in microfinance institutions.

Line of Credit - Agreement by a bank that a company may borrow at any time up to an established limit.

Liquidity - the degree to which assets are held in the form of money or in a form that can easily and immediately be converted into money. Liquidity can also be defined as the ability of an institution to meet its current financial obligations.

Liquidity Crisis - When a business finds there's not enough cash to pay for day-to-day operations, grow the business, or meet debt obligations when they are due, it's suffering a liquidity crisis and may look to an injection of cash to prevent business failure. The decision whether to "trade through" a liquidity crisis or declare bankruptcy depends on whether the business is considered viable.

Liquidity Management - The process of effectively balancing between two requirements: 1) satisfying all cash outflow requests and reserve requirements without having to sell assets at a loss or borrow at a high cost; and 2) holding enough assets in forms that earn sufficient interest to assure that operations are viable. Financial institutions use tools such as cash flow forecasting and ratio analysis to project future liquidity needs and monitor current liquidity levels. They also arrange reliable options for obtaining liquid funds quickly when needed (a line of credit for example) and for safely investing excess liquid funds at reasonable rates of return. One ratio used to monitor liquidity levels is the liquidity adequacy ratio, which measures the ability of the financial institution’s liquid cash reserve to satisfy client savings withdrawal demands after meeting all immediate obligations. It is defined as: (Short term-assets – short-term liabilities) / Savings deposits. Short-term assets are defined as total liquid assets with a maturity of less than 30 days. Short-term liabilities are defined as total short-term payables due in less than 30 days. Savings deposits are defined as total member deposits (all types). Under normal operating conditions (not considering seasonal demands), the liquidity adequacy ratio should be between 10% and 15% to meet operational liquidity demands without negatively impacting profitability. Whatever techniques are used, liquidity management policies and procedures should be clearly defined and documented.

Liquidity Reserve Requirements - Government regulations mandating the percentage of deposits that a financial institution must set aside as liquid reserves to be able to meet withdrawal demands. The reserve rate affects the viability of the institution in two ways. First, by improving the likelihood that depositors will be able to withdraw their funds when they want to, reserves protect the institution from the risk of a liquidity crisis and insolvency. Second, reserves often earn no or little interest, so if the reserve rate is high, the financial institution must compensate by obtaining a higher return when it invests the rest of its deposits. In some countries, non-bank deposit taking institutions are required to deposit their liquidity reserves in local banks or in a central finance facility. In these cases, the returns are determined by the reinvestment market, and are still likely to be lower than the returns on lending or long-term investments.

Liquidity Risk - The risk that a financial institution will not have enough liquid assets to meet the demand for cash outflows, including saving withdrawals, loan disbursements, and payment of operating expenses. A lack of liquidity can put a quick and final end to a financial institution’s efforts to mobilize deposits – and, in the worst case, can cause it to collapse or close. Deposit mobilization requires clients to trust that they will always be able to access their savings when they want or need them. A financial institution invests significant time and resources instilling this trust in clients, but a liquidity crisis can destroy it instantly.

Loan limit - The cap on the principal amount of a loan is generally set according to a borrower's ability to repay. But in payday lending, the loan limit has been offered by the industry as an empty concession. Loan limits are meaningless when a loan can be flipped repeatedly and borrowers can get loans from multiple lenders.

Loan loss provision - an accounting entry on the expense side of the income statement. It is made to adjust the loan reserve so that the loan loss reserve accurately reflects the risk of default in the portfolio. Loan loss provisions increase the loan loss reserve.

Loan Loss Provision Expense - A non-cash expense that is used to create or increase the Loan Loss Reserve on the balance sheet. The expense is calculated as a percentage of the value of the Gross Loan Portfolio that is at risk of default.

Loan Loss Rate - Total write-offs divided by active portfolio. The loan loss rate is an indicator to measure unrecovered loans.

Loan Loss Reserve - A provision set aside to cover potential losses. Microfinance organizations often establish a loan loss reserve equal to 2-5% of the value of their active portfolios.

Loan period - according to the loan agreement, for loans paid in regular installments, the length of time between installments.

Loan Products - Types of loans with particular sets of terms and conditions, and often for a particular use. Within the field of microfinance, loan products include fixed-asset lending, home improvement loans and solidarity group lending.

Loan term - The loan term is the length of time before the loan is due to be repaid in full. Most mortgage loans have 15 or 30-year terms. Many predatory consumer loans (payday loans, car title loans, refund anticipation loans) have very short loan terms, which increase the APR earned by the lender and/or pressure consumers into extending their loans at additional fees.

Mandatory arbitration - A clause in a loan contract that requires the borrower to use arbitration to resolve any legal disputes that arise from the loan. Mandatory arbitration typically means borrowers lose their right to pursue legal actions, including any appeals, in a court of law. Evidence indicates that arbitration is often costly for borrowers and may reduce their chances of receiving a fair outcome. Borrowers often are unaware that a mandatory arbitration agreement has been included in their home documents.

Market Rate - The rate of interest a company must pay to borrow funds currently. Program-related investments generally are offered at below market rates or at no interest rate.

Maturity Date - The date on which the principal amount of a note, draft, acceptance bond, or other debt instrument becomes due and payable.

Methodology - refers to how microfinance services are delivered to the client. Elements of a service delivery methodology include type of guarantee or collateral required, processes for client selection, and policies for receiving additional loans.

Microcredit - A part of the field of microfinance, microcredit is the provision of credit services to low-income entrepreneurs. Microcredit can also refer to the actual microloan.

Microenterprise - A small-scale business in the informal sector. Microenterprises often employ less than 5 people and can be based out of the home. Microenterprise is often the sole source of family income but can also act as a supplement to other forms of income. Examples of microenterprises include small retail kiosks, sewing workshops, carpentry shops and market stalls.

Microentrepreneur - Owner/ proprietor of a microenterprise.

Microfinance - Banking and/or financial services targeted to low-and-moderate income businesses or households, including the provision of credit.

Microfinance industry - We consider this to include the broad ecosystem of participants who contribute to the provision of formal financial services to those traditionally excluded from such services. This includes participants for whom microfinance is one area of many in which they work.

Microfinance Institution (MFI) - A financial institution - can be a nonprofit organization, regulated financial institution or commercial bank - that provides microfinance products and services to low-income clients.

Microfinance Investment Vehicle (MIV) - A financial structure that permits an intermediary to raise funds from public and private sources and invest them in MFIs, primarily in developing countries, with performance expectations that may range from sub-market to risk-adjusted returns. Because some investment structures are not funds per se, this term refers to the range of instruments used to facilitate direct or indirect funding in MFIs.

Microinsurance - A developing field of microfinance that provides health insurance and other insurance products to microentrepreneurs and employees in the informal sector.

Microloan - A loan imparted by a microfinance institution to a microentrepreneur, to be used in the development of the borrower's small business. Microloans are used for working capital in the purchase of raw materials and goods for the microenterprise, as capital for construction, or in the purchase of fixed assets that aid in production, among other things.

Microsavings - Microsavings are deposit services that allow people to store small amounts of money for future use, often without minimum balance requirements. Savings accounts allow households to save small amounts of money to meet unexpected expenses and plan for future investments such as education and old age.

Monitoring and Reporting - Management of the organization’s internal processes. This key term is a general catch-all for the following key terms. It is more general than MIS because it deals with issues beyond the technical system of monitoring.

Monoline lender - A monoline lender offers only one type of loan product. Most of the largest payday lending companies limit their services to this one highly profitable loan.

MSMEs per 1,000 people - Number of micro, small, and medium-sized enterprises for each 1,000 people

Net Loan Portfolio - Gross Loan Portfolio less the Loan Loss Reserve

Net Operating Income - Financial Revenue (Total) less all expenses related to the MFI’s core financial service operations, including Operating Expense, Financial Expense, and Loan Loss Provision Expense. It does not include Donations, or revenues and expenses from non-financial services.

Net private capital flows - Consist of private debt and non-debt flows. Private debt flows include commercial bank lending, bonds, and other private credits; non-debt private flows are foreign direct investment and portfolio equity investment.

NGO - An organization registered as a non profit for tax purposes or some other legal charter. Its financial services are usually more restricted, usually not including deposit taking. These institutions are typically not regulated by a banking supervisory agency.

Nominal interest rate - the stated rate of interest to be paid on a loan. The rate the lender says the borrower will pay, it can be either a flat or declining balance rate. Nominal interest rates reveal little about the costs of a loan.

Non-Bank Financial Institution - An institution that provides similar services to those of a Bank, but is licensed under a separate category. The separate license may be due to lower capital requirements, to limitations on financial service offerings, or to supervision under a different state agency. In some countries this corresponds to a special category created for microfinance institutions.

Non-conventional finance - The United Nations has defined non-conventional finance as any financing approach which, by modifying loan terms, guarantees, collateral and/or eligibility requirements, permits low-income households to qualify for and afford housing loans for which they would otherwise be ineligible owing to their limited financial and socio-economic circumstances. UNCHS (Habitat) has added that, in this context, the term "non-conventional" refers to financial mechanisms and not necessarily to institutions. Established institutions, such as building societies, savings and loan associations and housing banks, are likely to have conventional terms for loans. Institutions which are normally or primarily associated with housing finance, such as CBFIs, also have conventional loan terms although many do have various non-conventional techniques. It must also be noted that what is seen as conventional in one country can be non-conventional in another.

Non-Deliverable - A non-deliverable currency is not freely tradable, so cannot be physically delivered into the local currency market. The transaction is based on the change in market value from the time of the contract, and is calculated and paid in net dollars or another major currency. The transaction can be completed offshore without need for access to the local currency’s market.

Non-operating Expense - All expenses not directly related to the core microfinance operation, such as the cost of providing business development services or training (unless the MFI includes training as a requirement for receiving loans).

Non-operating Revenue - All revenue not directly related to core microfinance operations, such as revenue from business development services, training, or sale of merchandise.

Number of Active Borrowers - The number of individual who currently have an outstanding loan balance with the MFI or are responsible for repaying any portion of the Gross Loan Portfolio.

Number of Active Clients - Number of individuals who are active borrowers and/or savers with the MFI. A person with more than just one such account (i.e. with a loan and a savings account) is counted as a single client in this measure.

Number of active MF Investments - Number of active financial and technical (e.g. technical assistance) transactions (including loans & debt securities, equity, grants, guarantees and grants) carried on by the fund with its MFI clients.

Office of the Comptroller of the Currency (OCC) - Charters, regulates and supervises all national banks. It also supervises all federal branches and agencies of foreign banks.

Operating Expense - Expenses related to operations, such as all personnel expenses, rent and utilities, transportation, office supplies, and depreciation.

Operational efficiency - the cost per unit of loan outstanding (i.e., what it costs the MFI to lend each unit of money). Formula: Operating Expenses + In-kind Donations / Average Net Portfolio Outstanding

Operational Self-Sufficiency (OSS) - A measure of financial efficiency equal to total operating revenues divided by total administrative and financial expenses. If the resulting figure is greater than 100, the organization under evaluation is considered to be operationally self-sufficient. In microfinance, operationally sustainable institutions are able to cover administrative costs with client revenues.

Opportunity Costs - In the context of microfinance, opportunity costs include the time or anything "forgone" a borrower spends on applying and filling out the paperwork for a loan.

Options - Options are contracts giving the buyer the right, but not the obligation, to buy or sell a currency (or security or other asset) at an agreed-upon price during a certain period of time or on a specific date.

Outreach - the ability to reach large numbers of people, especially the very poor and less advantaged, with quality financial services. Outreach is considered along three dimensions: level of income or advantage of clients, scale of services, and quality of services. Deep outreach refers to reaching very poor or hard-to-reach clients. The latter could be women in certain societies or clients in sparsely populated areas with minimal infrastructure.

Outstanding balance - the loan balance. That is, the portion of a loan that has not yet been paid whether it is due or not.

Pari Passu - Equal in all respects, at the same pace or rate, in the same degree or proportion, or enjoying the same rights without bias or preference.  This term is often used to relate different series of equity or to rank issues of a company’s preferred shares.  In both cases the implication is that all iterations have equal rights and privileges.

Passbook Accounts - Demand deposit accounts that use passbooks rather than checks, ATMs or point of service devices for transactions.

Penetration - Number of credit union members divided by a country’s economically active population

Performance Standards - Normative levels set for specific performance measurements, like portfolio quality or leverage. In the field of microfinance, there are several entities and projects attempting to set universal performance standards for MFIs.

Physical productivity - refers to the physical output produced per input. An MFI may achieve a high level of physical productivity but still may have a low level of financial productivity. Measure: number of active clients per loan officer.

Population density (people per sq km) - Population density is midyear population divided by land area in square kilometers. Population is based on the de facto definition of population, which counts all residents regardless of legal status or citizenship--except for refugees not permanently settled in the country of asylum, who are generally considered part of the population of their country of origin. Land area is a country’s total area, excluding area under inland water bodies, national claims to continental shelf, and exclusive economic zones. In most cases the definition of inland water bodies includes major rivers and lakes.

Portfolio at Risk (PAR) - A standard international measure of portfolio quality that measures the portion of a portfolio which is deemed at risk because payments are overdue. PAR 30 means the portion of the portfolio whose payments are more than 30 days past due. PAR 30 above 5 or 10% is a sign of trouble in microfinance. High delinquency makes financial sustainability impossible for an institution.

Portfolio at risk rate - measures the level of risk in the portfolio by comparing the balance of all loans that have one or more payments past due to the outstanding portfolio. The portfolio at risk rate is considered the most appropriate measure of delinquency. Formula: Outstanding Balance of Loans with Payments Past Due / Current Portfolio Outstanding

Portfolio Past Due/ Delinquent Portfolio - Total amount of loan payments that are due but have not yet been paid divided by active portfolio.

Portfolio investment, bonds (PPG + PNG) (NFL, current US$) - Portfolio investment flows, bonds, are net and include portfolio debt flows: bond issues purchased by foreign investors.

Portfolio investment, equity (DRS, current US$) - Portfolio investment flows, equity, are net and include non-debt-creating portfolio equity flows: the sum of country funds, depository receipts, and direct purchases of shares by foreign investors.

Portfolio quality - refers in general to the amount of risk of default in the loan portfolio. A high quality portfolio contains a lower amount of risk. Portfolio quality changes continually as loans are disbursed, payments are made, and payments become due.

Portfolio yield - measures what the portfolio actually earned. Tells us about the MFI's pricing policy. Formula: Income from Lending / Average Net Portfolio for the Period. See Yield gap.

Poverty gap at $1 a day (%) - Poverty gap is the mean shortfall from the poverty line (counting the nonpoor as having zero shortfall), expressed as a percentage of the poverty line. This measure reflects the depth of poverty as well as its incidence. Population below $1 a day is the percentage of the population living on less than $1.08 a day at 1993 international prices (equivalent to $1 in 1985 prices, adjusted for purchasing power parity).

Predatory lending - A term for a variety of lending practices that strip wealth or income from borrowers. Predatory loans typically are much more expensive than justified by the risk associated with the loan. Characteristics of predatory loans may include, but are not limited to, excessive or hidden fees, charges for unnecessary products, high interest rates, terms designed to trap borrowers in debt, and refinances that do not provide any net benefit to the borrower.

Preemption - A term used when one law or rule directly overrides an existing law or rule. Preemption provisions in a federal law generally displace state laws governing the same topic. In the area of predatory lending, federal preemption would nullify many state protections for homeowners and prevent states from addressing local predatory lending issues as they arise.

Principal - The original balance of money lent, excluding interest. Also, the remaining balance of a loan, excluding interest.

Private capital flows, total (% of GDP) - Consist of private debt and nondebt flow. Private debt flows include commercial bank lending, bonds, and other private credits; nondebt private flows are foreign direct investment and portfolio equity investment. This is expressed as a percentage of GDP per capita.

Private credit to GDP - Ratio of claims of financial institutions on the private sector to GDP

Private Investors - Individuals, corporations and foundations rather than governmental and multilateral institutions.

Product, or Service - refers to what is delivered to the client. Elements of a loan product include the loan size, price (interest rate), repayment intervals, term and purpose.

Profit Margin - Net Operating Income/ Financial Revenue (Total)

Program-Related Enterprise - A business or enterprise designed to promote the social purpose goals of an organization as well as generate revenue. Among nonprofits, products and services are usually, but not exclusively, identified with the purpose of the organization. Activities can range from fee-for-service charges to full-scale commercial ventures.

Real Economy - The nonfinancial economy—for example, manufacturing, farming, trade, and services.

Real interest rate (%) - Real interest rate is the lending interest rate adjusted for inflation as measured by the GDP deflator.

Recourse - Refers to the right, in an agreement, to demand payment from the person who is taking on an obligation. A full recourse loan refers to the right of the lender to take any assets of the borrower if repayment is not made. A limited recourse loan only allows the lender to take assets named in the loan agreement. A non-recourse loan limits the lender's rights to the particular asset being financed -- an approach that is common in home mortgages and other real estate loans.

Refinance - The payoff of an existing loan with a new loan using the same property as security. Homeowners often request refinances to get cash drawn from existing home equity or to obtain a new mortgage with a better interest rate and/or payment terms. Most predatory mortgage lending occurs among refinances in the subprime market.

Regulation and Supervision - The creation and enforcement of a set of rules and standards for financial institutions, including MFIs. These rules are usually set by a country's central bank or superintendency of banks, or by other banking agencies.

Relevant portfolio - in calculating the loan loss rate, the relevant portfolio is the portfolio of loans disbursed to which the losses are attributable.

Remittances - Cross-border money transfers, often sent from workers employed abroad back to their families in their country of origin. Remittances are a major source of capital for developing countries, and they have been soaring in recent years, helped by lower money-transfer costs. The economic downturn in developed countries will likely lead to reduced remittances to developing countries.

Repayment rate - measures the amount of payments received with respect to the amount due. Does not measure the risk in the portfolio (as do the portfolio at risk and other delinquency measures.)

Required yield on portfolio - the income the institution will need to receive in order to cover all costs. The required yield is often expressed as a percentage of the average outstanding portfolio.

Responsible Lending - Lending policies and practices of financial institutions that take steps to ensure that clients are treated fairly, and benefit from the loans they receive. Central to the responsible finance concept is a commitment by the lender to avoid over-indebting clients, by offering well-designed products and carefully establishing ability to repay.

Resource-Dependent Communities - Primary resource-dependent communities, eg. fishing, forestry communities. These resources discuss microfinance as an alternative to activities that are heavily dependent on natural resources.

Restructure - A revision of a financial agreement that alters the conditions or covenants of the original agreement. For example, parties may agree to restructure a loan agreement, easing the payment schedule, when a borrower is delinquent or otherwise faces default on a loan.

Return on Assets (%) - (Net Operating Income, less Taxes)/ Period Average Assets

Return on Equity (%) - (Net Operating Income, less Taxes)/ Period Average Equity

Risk Coverage Ratio (%) - Loan Loss Reserve/ PAR > 30 Days

Risk Management - A systematic approach to identifying, measuring, monitoring and managing business risks in an institution. Effective risk management includes the following steps: 1) Identify, assess and prioritize risks; 2) Develop strategies to measure risk; 3) Design policies and procedures to mitigate risks based cost/benefit analyses of different measures; 4) Implement and assign responsibility for policies and procedures; 5) Test their effectiveness and evaluate the results; and 6) Revise policies and procedures as needed. The operational risks that financial institutions must manage include credit risk, liquidity risk, interest rate risk, reputation risk, transaction risk (the risk of financial loss due to negligence, mismanagement or errors), and fraud risk.

Rotating Savings and Credit Associations (ROSCAs) - Informal savings and credit groups in which each member deposits the same amount of money at the same regular interval; each time members deposit, they give the whole of the amount collected to one member. When there have been as many distributions as there are members, the ROSCA ends. Everyone has put in and taken out the same amount; for example, ten people each save $10 a week, and each week for ten weeks one person walks away with $100.

Savings Banks - Banks that focus on savings mobilization as their core business. Found worldwide, some of savings banks are public, some are private, and some function as cooperatives. Many are postal savings banks that offer their services through their countries’ post office branch network. Savings banks often have far greater rural outreach than other bank networks and tend to offer products with terms that are more manageable for the poor than typical commercial banks. A recent global study estimated that “alternative financial institutions” - institutions that reach lower-income clients than those generally served by commercial banks – hold an estimated 570 million deposit accounts worldwide. Postal savings banks alone hold nearly four-fifths of these accounts and non-postal savings banks, which were not included in the global figure, might hold an additional 150 million accounts.

Savings Mobilization - Programs intending to mobilize the capital of the poor and to provide savings accounts, as well as credit services, to microentrepreneurs and low-income households.

Savings / Regular Savings Accounts - AccountsDemand deposit accounts that use passbooks, magnetic stripe or smart cards, ATMs, POS devices or some combination of these for transactions. They do not allow accountholders to use checks.

Savings / Self-Help Groups - Found everywhere, but especially in South Asia, savings groups provide their members with a mandatory illiquid savings service coupled with access to loans. Composed of about five to twenty members, each group meets monthly or weekly close to members’ homes. At each meeting all members save the same amount. The groups then lend these savings to members, store them in a lockbox, or deposit.

Secondary market - The market where lenders and investors buy and sell existing mortgages or mortgage-backed securities, thereby providing additional funds for mortgage lending.

Securitization - From mortgages to car loans, to credit cards, to microcredit loans—financial assets can be packaged, pooled, and sold to investors as securities. While securitizations of microfinance related assets are relatively new, in the United States the value of pooled securities overtook the value of outstanding bank loans in 2001. One important motivation for securitization is that it can be a cheaper method of raising capital.

Security - A generic term for a wide variety of investment instruments. Securities may represent ownership of equity (such as common stocks); indebtedness (such as debt securities); a financial interest in a group of mortgages (such as mortgage-backed securities); or potential ownership (such as an option).

Service Provider (SP) - An entity that helps advise, structure, consult or broker investments in the microfinance industry.

Settlement - The closing of a mortgage loan. Also, the delivery of a loan or security to a buyer.

Small & Medium Scale Enterprises (SMEs) - Enterprises employing 5 to 10 workers (small-scale) or between 10 and 50 workers (medium-scale).

Spread - the difference between two measures, usually expressed as percentages, such as the difference between the operational and financial self-sufficiency of an MFI. Subsidy Adjustment Formula: (Average Liabilities x Shadow Price of Funds) - Actual Interest and Fee Expense

Standby Letter of Credit - A Standby Letter of Credit (SBLC) is a Letter of Credit (LOC) designed to be used only when the applicant defaults on payment. The Standby Letter of Credit (SBLC) assures the lender of the performance of the borrower’s obligation, and is generally issued by a highly rated bank, essentially helping to substitute the bank’s risk for the issuer’s risk, thereby providing investors with greater protection.

Stepped Lending - The process by which borrowers who repay loans on time are eligible for increasingly larger loans. Stepped lending keeps initial risk at a minimum while allowing microentrepreneurs to grow their businesses and increase their incomes.

Structure of GDP: Agriculture, Industry, Services - Proportional contribution of different sectors to a country’s GDP

Subprime lending - A type of mortgage lending intended to serve borrowers who do not qualify for prime loans because of credit problems or a limited credit history. Virtually all predatory mortgage lending occurs in the subprime market.

Subprime loan - A loan offered at a higher rate of interest for people who do not qualify for prime rate interest rates (the rates charged by banks to their most “creditworthy” borrowers). Often, subprime borrowers are turned away from traditional lenders, because of their low credit ratings or other factors that could suggest that they might default on the loan.

Microfinance loans have shown that poor clients can pay back loans at remarkable rates—on average 98%—in the right conditions.

Subsidized Rates of Interest - Loan interest rates that are kept artificially low (below market rates) by the lending institution; often subsidized by donations.

Supervision - Systematic oversight of deposit-taking financial service providers to make sure that they comply with the regulations governing them, or to close them if they do not. Supervision plays a crucial role in protecting depositors from losses due to mismanagement or fraud. Typically, regulatory agencies have very limited resources yet are responsible for assuring the stability of the country’s financial system. As a result, policy makers must balance systemic risk and the costs of supervision to make the best use of scarce supervisory resources. The cost of prudential supervision is high relative to the size of most microfinance institutions. This presents a challenge: how to effectively supervise the microfinance sector to protect the savings of small depositors without placing excessive cost burdens on either the regulator or the microfinance institutions. In many cases, policy makers prioritize the regulation of financial institutions that hold large volumes of deposits and/or accounts for large numbers of the population.

Sustainability - An organization's ability to cover costs. There are varying degrees of sustainability, ranging from not sustainable to financially sustainable (see Financial Self-Sufficiency and Operational Self-Sufficiency).

Taxes - Includes all taxes paid on net income or other measure of profits as defined by local tax authorities. This item may also include any revenue tax. It excludes taxes related to employment of personnel, financial transactions, fixed-assets purchase or other value-added taxes.

Technical Assistance - Exchange of knowledge, product and services and management technology between technical service providers and microfinancial institutions.

Term / Time Deposit / Certificate / Fixed Deposit - A savings product in which a client makes a single deposit that cannot be withdrawn for a specified period of time. At the appointed time, the client withdraws the entire amount with interest. The financial institution offers a range of possible terms and usually pays a higher interest rate than on its demand deposit or contractual products. Because they tend to be larger than other types of deposits, have contracted withdrawal times, and involve fewer transactions, time deposits can provide a significant source of relatively low-cost funds that facilitate ALM. This is particularly true if an MFI can attract large and institutional depositors.

Total Expense Ratio (%) - (Financial Expense + Loan Loss Provision Expense + Operating Expense) / Average Total Assets

Traditional Finance Schemes - Pawnbrokers, rotating savings and credit associations, individual savings groups, tontines.

Transaction Costs - Imputed costs from organizational operations and activities in relation to client services and other organizational interactions (eg. Processing fees).

Transformation - In a microfinance context, transformation refers to the process by which a nonprofit community organization or an NGO becomes a regulated financial institution.

Transparency - The degree of a financial institution/ MFI's openness as determined by a sequence of financial information-gathering and testing. A transparent microfinance organization gathers and reports accurate financial information on its own, to be verified and analyzed by external parties. These external authorities ensure that the MFI's performance complies with appropriate industry standards.

Trend analysis - the comparison of financial ratios for one financial institution over time. Trend analysis is a key to analyzing financial ratios. No ratio is an island.

Triple-digit interest - Payday and overdraft loans typically carry triple digit interest rates. The annual percentage rate (APR) for payday and other predatory consumer loans generally exceeds 400%.

Unbanked - Unbanked describes people who have no access to financial services (services that include savings, credit, money transfer, insurance, or pensions) through any type of financial sector organization such as banks, non-bank financial institutions, financial cooperatives and credit unions, finance companies, and NGOs. Implicit in this definition is that financial services are usually available only to those individuals termed “economically active” or “bankable”.

Unemployment, total (% of total labor force) - Total number of individuals that are actively seeking jobs who remain unhired.

Underwriting - A lender's process for assessing the risk involved in making a mortgage loan to determine whether the risk is acceptable. Underwriting involves an evaluation of the value of the property and the borrower's willingness and ability to repay the loan.

Usury - The practice of charging exorbitant, sometimes illegal interest rates for consumer credit. Payday and overdraft loans typically carry an annual percentage rate (APR) of over 400%, sometimes exceeding 1000%.

Vertical growth - growth within existing service areas through product diversification and expanding clientele.

Viability - refers to financial and institutional viability. Financial viability is the ability of a microfinance institution (MFI) to cover its costs with its interest and fee revenues. Institutional viability is the capacity of the institution to continue to thrive as a sound service delivery organization. Viability allows MFIs to maintain their operations into the future, independent of donor subsidy or grant funding.

Village banking - Lending methodology in which clients - typically women - form groups of approximately 10-30 individuals that are autonomously responsible for leadership, bylaws, bookkeeping, fund management and loan supervision. The group pools funds to use for business loans, savings, and mutual support, and members cross-guarantee individual loans.

Volatility - Volatility is a statistical term to quantify the dispersion of variables such as rates or prices around the mean; also a measure of the variability of the price of an underlying financial instrument, rate, commodity, or currency. Volatility measures only the quantity of the change, not the direction.

Voluntary Savings - Deposits from the general public and members that are not maintained as a condition for accessing a current or future loan and are held with the institution.

Workers' remittances, net (BoP, current US$) - Workers' remittances are current transfers by migrants who are employed or intend to remain employed for more than a year in another economy in which they are considered residents. Some developing countries classify workers' remittances as a factor income receipt (and thus as a component of GNI [gross national income—formerly gross national product, or GNP]). The World Bank adheres to international guidelines in defining GNI, and its classification of workers' remittances may therefore differ from national practices.

Workers' remittances, receipt (BoP, current US$) - Workers' remittances are current transfers by migrants who are employed or intend to remain employed for more than a year in another economy in which they are considered residents. Some developing countries classify workers' remittances as a factor income receipt (and thus as a component of GNI [gross national income—formerly gross national product, or GNP]). The World Bank adheres to international guidelines in defining GNI, and its classification of workers' remittances may therefore differ from national practices.

Working Capital - Defined as the difference between current assets and current liabilities, excluding short-term debt.

Write-off - Charging an asset amount to expense or loss. A microfinance institution writes off loans not expecting to collect them, while continuing to attempt collection.

Write Offs for the 12-month period - Total amount of loans written off during the period. A write-off is an accounting procedure that removes the outstanding balance of the loan from the Gross Loan Portfolio and from the Loan Loss Reserve when these loans are recognized as uncollectable.

Write-off policy - the institution's policy governing when loans are "written off," or declared non-recoverable and deducted from the loan loss reserve. A standard recommendation is that loans past due for one year without any payments being made should be written off.

Yield gap - a comparison between what the portfolio actually earned and what it should have earned given pricing and product structures. A yield gap may be caused by delinquency, fraud, poor MIS, or structure of loans and disbursement.

% allocation to MF Investments - The fund's monies expressed as a % of the fund's assets that are set aside specifically for investment in the Microfinance sector (as opposed to other industries/sectors/ type of projects that the fund may invest in).

% investments/commitments to MF Investments - The fund assets expressed as a % of the fund's assets that are already invested in MF sector or committed to specific MFIs, but not yet paid out to these institutions. This may be more than the amount invested and disbursed (not detailed here). It is an efficiency measure for how well the Fund commits monies to MFIs (not how well the Fund disburses or "hands out" the monies).

% of the Fund allocated to MF Investments - The fund's monies expressed as a % of the fund's assets, that are set aside specifically for investment in the Microfinance sector (as opposed to other industries/sectors/ type of projects that the fund may invest in).

% of the Fund invested in or committed to MF Investments - The fund assets expressed as a % of the fund's assets that are already invested in MF sector or committed to specific MFIs, but not yet paid out to these institutions. This may be more than the amount invested and disbursed (not detailed here). It is an efficiency measure for how well the Fund commits monies to MFIs (not how well the Fund disburses or "hands out" the monies).

The glossary includes definitions from the following sources: Calmeadow; Anita Campion (MicroFinance Network); Robert Peck Christen and Richard Rosenberg (CGAP); Center for Responsible Lending; CGAP; Economist Intelligence Unit; Global Development Resource Center; Heritage Foundation; IAMFI; IMF; International Year of Microcredit 2005; Organization for Economic Co-operation and Development; Savings Operations for the Poor: An Operational Guide (Madeline Hirschland, ed.); United Nations; World Bank; and World Council of Credit Unions.

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