SEEP Calls for comment to shape new Microfinance Financial Reporting Standards

Microfinance Focus, July 22, 2010: The SEEP Network, a US based NGO that works with MFI associations in North America and throughout the world (and celebrating its 25^th anniversary this year), is leading a voluntary compliance effort to bring together necessary stakeholders on reporting standards for MFIs. It is called the Microfinance Reporting Standards Initiative .  The new standards will increase transparency, facilitate comparability, improve decision-making, and increase investment by making it easier to observe and understand an MFI’s financial health.

.

Given extensive industry evolution and recent economic volatility, engaging practitioners around a single set of standards has not been easy. Microfinance is increasingly diverse, particularly with increasing numbers of deposit taking and regulated institutions. Increased private investment and the global economic downturn have highlighted the need for better information on capital adequacy, capital quality, and foreign exchange risk.

Collaborative efforts led to a 2005 publication of the SEEP FRAMEWORK “Measuring Performance of Microfinance Institutions, a Framework for Reporting, Analysis, and Monitoring.” The Framework includes foundational information for uniform financial statements and 18 ratios designed to measure MFI performance in four areas: 1) sustainability/ profitability; 2) asset and liability management; 3) portfolio quality; and 4) efficiency/ productivity. Such information is used on MIX Market, the FRAME tool, investors/donors, MIS software vendors, raters, regulators, auditors, etc. The original Framework was tailored to credit-only institutions.

Today in 2010, SEEP has the next iteration of the Microfinance Financial Reporting Standards with extensive updates to the Framework. The current draft adds new ratios to better convey financial position and performance. It adds information on savings to be more pertinent for deposit taking institutions and credit unions. Guidance is provided for capital adequacy, capital quality and foreign exchange risk. The ratios incorporate recent developments in international accounting and financial reporting, including new standards and guidelines from IASB, Basel II, and IFRS.  For example, OSS and FSS are suggested to be removed and replaced by ROE and ROA to reflect the fact that MFIs can and must cover their costs (aka be profitable or at least break even).

These changes add requirements for MFI disclosure, financial statement preparation and reporting. It is a necessary step to make reporting more thorough and valuable for MFIs, raters, investors and other stakeholders. This ensures MFI reporting is in line with banking and accounting standards, and complying with international best practices.

Dozens of organizations are involved, including Social Enterprise Associates, Mennonite Economic Development Associates (MEDA), CHF International, Opportunity International, The Microfinance Information Exchange (MIX) and many other highly knowledgeable microfinance stakeholders. Investors, donors, raters, and others are providing feedback. Please take a look and share with others to participate in this open review period.

Once industry-wide consensus has been built, the SEEP Network will release a second edition of the Framework, likely in late 2010.

—————————-

To provide opinions, financial support, and/or other contributions to this initiative, visit www.reportingstandards.org. You may also contact Lindsey Longendyke at SEEP (longendyke@seepnetwork.org) or Drew Tulchin (drew@socialenterprise.net).

© 2010, Microfinance News. All rights reserved. 2008-09