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4 Capital Adequacy Ratios for Microfinance

by Simon Goble on June 21, 2016

Topics: Microfinance | Microfinance Ratios

Key to understanding if a microfinance institution can absorb unexpected losses is the ability to monitor capital adequacy and solvency ratios. Here are four capital adequacy ratios:

1. Debt to Equity Ratio

This ratio shows liabilities over equity and indicates how an MFI has leveraged its own funds to finance its loan portfolio. Excessive leveraging may indicate a risk issue in an MFI’s ability to absorb sudden losses.

2. Equity to Assets Ratio

This ratio provides a good indication of solvency and the ability of an MFI to meet its obligations and absorb sudden losses.

3. Capital Adequacy Ratio

By using total capital over risk weighted assets this is a better measure of equity to assets ratio and meets Basel II requirements.

4. Uncovered Capital Ratio

Shows the impairment loss allowance over capital and indicates the impact of potential portfolio losses on an MFI’s capital base.

To learn more about managing financial performance and social performance in microfinance download our eBook on managing multiple bottom lines.

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