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Financial Performance Monitoring: A Guide for Board Members of Microfinance Institutions

Among the many responsibilities of a board of directors is monitoring performance. In the case of financial institutions, board members must be capable of monitoring financial performance. “A good board member asks questions, including financial questions.” To be more precise, a good board member must ask relevant and timely financial questions that assist the board in making decisions. For many board members of MFIs, especially those who have limited experience in microfinance or are new to the board, it is not always easy to know what questions to ask or when to ask them. Board members do know whom to ask; management answers the board’s questions. However, if questions are asked too late, or do not address crucial issues, important information might never be shared—not necessarily out of lack of transparency, but out of lack of preparedness of board members.

In order to ask relevant and timely financial questions, board members of MFIs need to be familiar with performance monitoring techniques. This requires that the board have a basic understanding of the key quantitative and qualitative information needed to govern an MFI. The purpose of this manual is to provide reference material for MFI board members to help them understand the role of financial performance monitoring as part of governance and what to look for when monitoring financial performance.

However, the manual is not a financial analysis handbook. While the concepts of financial analysis are discussed, including financial ratios, it will not train the reader how to be an analyst. Rather, it offers suggestions on what a board member should look for when presented with financial statements and ratios, and introduces different methods of financial analysis. The manual does not provide “right” or “wrong” answers; rather, it explains how a board can distinguish between information that makes sense and reveals positive trends that further the goals of the MFI and answers that do not make sense or that may signal trouble ahead.

It is assumed that the manual will be accompanied by a training session for the board, tailored to meet the MFI board’s particular needs. The training would be a hands-on session, utilizing the MFI’s own financial data, and would include some or all of the exercises and activities detailed in the annexes of the guide.

The manual is divided into four chapters. The first briefly discusses an overall performance monitoring system, highlighting the traditional involvement and responsibilities of an MFI board in maintaining that system. Chapter Two focuses on financial performance monitoring and provides detailed information on financial statements, financial analysis, and ratio analysis. Chapter Three discusses financial reporting by management. The fourth chapter briefly discusses the challenges that a board may face in maintaining an adequate performance monitoring system and provides some suggestions on how to address the same. The annexes contain several exercises in financial and ratio analysis to help build the understanding and skills of board members in order to enable them to perform their financial performance monitoring duties. Annex 1 includes a performance monitoring worksheet that will help a board design a performance monitoring system of its own. Annex 2 includes a series of exercises that the board can use to analyze the financial performance of its MFI. Annex 3 contains an example of break-even analysis, and Annex 4 provides a financial reporting checklist. Finally, Annex 5 contains a resource list for more information on financial performance monitoring.