Glossary of Microfinance Related Terms

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Active Clients:
The 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:
The total amount loaned out less the total amount of repaid loans; i.e., all money that is "on the street" or owed to the institution in the form of loans on the date the report is filed.

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.

Benchmarking:
Peer group 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.

Bridge financing:
Interim financing used to solidify a position until more permanent financing can be made. The ACCION Latin America Bridge Fund provides bridges from microfinance institutions to local capital markets.

Capital Adequacy:
A quantitative and qualitative measure of an institution's level of equity versus the risk it incurs. This measurement shows a program's ability to absorb loan loss.

Capital markets:
The market for trading long-term debt instruments (those that mature in more than one year).

Collateral:
Asset pledged by a borrower to secure a loan, which can be repossessed in the case of default. In a microfinance context, collateral can vary from fixed assets (a car, a sewing machine) to cross-guarantees from peers.

Commercial Financial Viability:
See Financial Self-Sufficiency

Commercialization:
In a microfinance context, commercialization refers to the move by MFIs to provide services on a financially self-sufficient basis and under prevailing commercial principle and regulations.

Credit Bureau:
An agency that contains information on the credit history of consumers so that creditors can make decisions about granting of loans.

Credit Rating:
Usually used to determine a bank or financial institution's credit risk, a credit rating is an evaluation of an individual's or company's ability to repay obligations or its likelihood of not defaulting.

Credit Scoring:
Measures the risk associated with each credit applicant/ microborrower. Credit scoring is an automated system that assigns points for various credit factors, providing lenders with the ability to grade prospective clients and to calculate the risk of extending credit. In a microfinance context, the credit scoring method is modified to take into account a microentrepreneur's experience, character and capacity to repay. The final credit score is an overall measure of the creditworthiness of the credit applicant.

Credit Union:
A nonprofit, cooperative financial institution owned and run by its members. Members pool their funds to make loans to one another. The volunteer board that runs each credit union is elected by the members. Most credit unions are organized to serve people in a particular community, group or groups of employees, or members of an organization or association.

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

Development Finance:
Term that encompasses all financial services provided to low-income clientele in less developed nations - 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.

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.

Financial Systems Approach:
See Financial systems section/ "ACCION's approach".

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.

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.

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.

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.

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.

Loan Guarantee:
See Collateral.

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 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.

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 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.

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.

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.

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.

Portfolio at Risk:
Measurement of the total outstanding balance of loans past due - not late payments or payments not yet due - divided by the active portfolio. A more rigorous manner of assessing portfolio quality than portfolio past due/ delinquent portfolio.

Portfolio Outstanding:
See Active Portfolio.

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

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.

Remittances:
1. Money sent by expatriate migrant worker to family in home country. 2. A payment in cash, check or electronic transfer.

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.

Securitization:
The process of pooling a group of assets, such as loans or mortgages, and selling securities backed by these assets. Securitization is one way microfinance institutions can access capital markets, improve liquidity and lend more money, all while managing risk.

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

Solidarity Group:
See Group Lending.

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.

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

Supervision:
See Regulation and Supervision.

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).

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.

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.

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.