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Trainer Manual Trainer Manual for the SIMFI Microfinance Simulation ADA, ATTF & STACHANOV Winter / Spring 2012


Trainer Manual for the SIMFI Microfinance Simulation CONTENTS CONTENTS ................................................................................................................................... 2 ACKNOWLEDGEMENTS ............................................................................................................. 3 GETTING STARTED ..................................................................................................................... 4 STRUCTURE OF THE TRAINER WEBSITE ................................................................................ 5 1: NUMBER OF CLIENTS ............................................................................................................. 7 2: CUTTING THE CAKE: ALLOCATION OF CLIENTS TO PARTICIPANTS ............................... 9 3: INTEREST SHORT-TERM DEPOSITS .................................................................................. 13 4: INTEREST SHORT-TERM INDIVIDUAL LOAN ..................................................................... 16 5: INTEREST SHORT-TERM GROUP LOAN ............................................................................ 20 6: CALCULATION OF TOTAL PORTFOLIO FOR SAVINGS ..................................................... 24 7: CALCULATION OF TOTAL PORTFOLIO FOR LOANS ......................................................... 26 8: PORTFOLIO AT RISK & PORTFOLIO QUALITY ................................................................... 29 9: PERFORMANCE RATIOS: PROFITABI-LITY ANALYSIS AND SUSTAINABILITY .............. 35 9.1: RATIOS: FINANCIAL STRUCTURE .................................................................................... 42 9.2: RATIOS: EFFICIENCY AND PRODUCTIVITY .................................................................... 48 10: CASH ON HAND AND OTHER SHORT TERM LIABILITIES ON BALANCE SHEET ......... 52 11: LEGAL STRUCTURE AND EQUITY .................................................................................... 53 12: DEPRECIATION & INFLATION ............................................................................................ 56 13: BONUSES AND PENALTIES ............................................................................................... 59 14: OVERVIEW OF MATURITIES, LOANS, INVESTMENTS, FUNDS AND DEPOSITS.......... 62 15: REGULATION LEVEL ........................................................................................................... 63 16: CALCULATION SALARY ...................................................................................................... 65 17: CALCULATION RUNNING COSTS ...................................................................................... 66 18: PROJECTED BALANCE ....................................................................................................... 67 19: SHOCKS ............................................................................................................................... 69 20: LIFE INSURANCE ................................................................................................................. 70 21: MONEY TRANSFER ............................................................................................................. 71 22: EFFECTS OF CURRENCY CHANGES ................................................................................ 75 23: VARIATION LOAN SIZE AND DEPOSIT SIZE..................................................................... 79 24: NUMBER OF GROUP CLIENTS .......................................................................................... 81 25: REGISTRATION OF LOANS & DEPOSITS ......................................................................... 83 26 INITIALISATION ..................................................................................................................... 87 27: COMPULSORY SAVINGS .................................................................................................... 89


ACKNOWLEDGEMENTS The Luxembourg organisations ATTF (Agence de Transfert de Technologie Financière) and ADA (Appui au Développement Autonome) had the strategic vision to develop a banking simulation program geared at microfinance. Stachanov Solutions and Services bv joined the cooperation as the development partner. Marilène Oberlin, Yves Mathieu, Jean-Jacques André, Paul Surreaux, Menno Jager, and Alvin Lau have contributed largely to both the program and this manual. Amsterdam, March 2012 André Koch Stachanov Solutions & Services bv

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GETTING STARTED The SIMFI platform simulates management over a microfinance institution (MFI). SIMFI is offered via Internet: microfinance.mercursim.com/MFTrainee There is a second website, exclusively for use by the trainer, to set-up, organise, and manage the simulation sessions. microfinance.mercursim.com/MFTrainer In order to log in tot the trainer site, the trainer needs a login name and a password. These login names and passwords are distributed through ADA, ATTF, or Stachanov. In case there are technical problems with the SIMFI simulation, the following phone number can be called: +31 20 5091010. Please, when calling, make clear you have a question regarding the SIMFI simulation.

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STRUCTURE OF THE TRAINER WEBSITE The trainer website consists of the following pages:

Dashboard 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

On this page new simulation sessions can; Create a new simulation; Retrieve an existing simulation; Delete an existing simulation; Create teams of participants; Manage teams’ login names and passwords; Run a simulation session and move it forward to the next round; Roll back a simulation session and reset it to the previous round; Add an update the note presented to the participants; Download the Excel model behind the simulation, and Check the simulation history.

Decisions Allows the trainer to check the decisions made in the last decision round for each of the participating teams. The decisions are split into three sections: 1. Assets; 2. Liabilities, and 3. Other.

Institution This page enables the trainer to set the parameters regarding the MFI. The trainer enters his setting through the screen by entering number or making a selection in a pull down menu. For most of the decisions, a range is given indicating minimum and maximum values for acceptable decisions. Moreover, a default value is given which provides some guidance toward decision making. These default values are also filled out already under My input.

Market information This page enables the trainer to set the macroeconomic parameters, the probabilities of default for the MFI’s loan product, and the interest rates for investment and funding products on the market. The trainer enters his setting through the screen by entering number or making a selection in a pull down menu.

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Background teams Apart from the participating teams, a number of background MFIs also takes part in the simulation. The background teams ensure a dynamic and deep market environment and bar market and pricing arrangements between the MFIs. The trainer can set and manage the decisions for the background teams in this page.

Results participants Provides a concise overview of the key performance indicators for the participating teams.

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1: NUMBER OF CLIENTS General introduction / Role in Simfi This formula is used to calculate the number of active clients on the microfinance markets that will be divided amongst the players and background teams.

Where? Most of the parameters used stem from the Market information pages. Apart from the default value, the table below also shows the minimum and maximum values. Acronym

Description

NC(0)

Initial number of active clients

GDP

Gross Domestic Product growth rate

6%

0%

25%

IR

Inflation rate

6%

0%

50%

1

0

1000

5%

0%

10%

SC

Simulated vs international currency

PGR

Population Growth Rate

SND

Shock Natural Disaster

Prob.

Probability

UE

Unemployment rate

FDI

Foreign Direct Investment

BI

Business Index Weight Gross Domestic Product growth

Wgdp Wir

Default value

Min

Max

56,000

1 15% 15% 500,000,000

15% 1,000,000

40% 10bn

150

1

181

100.00%

0.00%

500.00%

100.00%

0.00%

500.00%

100.00%

0.00%

500.00%

Wsc

Weight Inflation Rate Weight Simulated vs. international currency

Wpgr

Weight Population growth

100.00%

0.00%

500.00%

Wue

-100.00%

-500.00%

0.00%

Wfdi

Weight Unemployment growth Weight Foreign Direct Investment growth

100.00%

0.00%

500.00%

Wbi

Weight Business index growth

-100.00%

-500.00%

0.00%

Table 1

In the instructor site, the weighting factors WGDP , WIR , WSC , WPGR , WUE , WFDI , WBI and the initial number of clients NC ( p = 0) can be filled out in setup step 7 or in the menu item “Institution”. The economic parameters GDP , IR , PGR , UE , FDI , BI and shock parameter S ND are inserted in setup step 4 (only for period p = 0 ) and in the menu item “Market information”.

Formula In the calculation, the loan and deposit products of each player are divided among the clients in the market. The total number of clients NC ( p ) in period p depends on the

economic parameters and the initial number of clients NC ( p = 0) as follows: NC ( p ) = NC (0) × F (GDP, IR, SC , PGR, S ND , UE , FDI , BI )


The dependence of F on the parameters is expressed by the following equation: F = 1 + WGDP ×

GDP( p ) − GDP(0) SC ( p ) − SC (0) + W IR × ( IR( p) − IR(0)) + W SC × + GDP(0) SC (0)

p

W PGR × ( ∑ PGR( p' ) − 0.20 × S ND ( p' )) + WUE × (UE ( p) − UE (0)) + p '=1

W FDI

FDI ( p) − FDI (0) BI ( p ) − BI (0) × + W BI × FDI (0) BI (0)

The factor F is multiplied by 0.75 when the shock “natural disasters” takes place in period p , so the corrected factor FND can be written as: FND = F × (1 − 0.25 × S ND ( p ))

where: S ND = S ND ( p ) =

Decision shock “natural disaster” for period p . If this shock takes place, then S ND ( p ) = 1 , otherwise S ND ( p ) = 0

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2: CUTTING THE CAKE: ALLOCATION OF CLIENTS TO PARTICIPANTS General introduction / Role in Simfi When the total number of clients NC ( p ) has been calculated, it can be determined how the loan products and deposit products are divided among the clients in the market. In the calculation, 1 client equals 1 contract. The loan products and deposit products are “Short term loans maturity 3 months”, “Short term loans maturity 6 months”, “Short term loans maturity 9 months”, “Short term loans maturity 12 months”, “Long term loans maturity 2 years”, “Long term housing loans maturity 5 years”, “Short term time deposits maturity 3 months”, “Short term time deposits maturity 6 months”, “Short term time deposits maturity 9 months”, “Short term time deposits maturity 12 months”, “Long term time deposits maturity 2 years” and “Demand deposits”. For each of these 12 products the number of available contracts is the same, and equal to the total number of clients NC ( p ) . Each client takes one contract for each product in each period p . The client can choose at which institution he will ask for a contract. Each participant in the simulation represents an institution. For any product, some institutions will have more clients than other institutions.

Where? The parameters to manipulate the Cutting the Cake formula can be adjusted by the trainer in: Institution>Exponential factor on … Institution>Weighting factor on … Setup>Other parameters>Exponential factor on … Setup>Other parameters>Weighting factor on …

Calculations The number of allocated clients depends on the interest rate and average loan or deposit amount. If, for a certain loan product, a participant chooses a lower interest rate than other participants, then his loan products are more attractive, resulting in a higher number of clients for this product. More clients are also attracted when the average loan amount is greater. The percentage of allocated clients Ploan ( p, i ) of participant i depends on the interest and average loan amount, calculated by the following formula: Ploan ( p, i ) = Wint ×

Cint (i ) N

∑C j =1

int

( j)

+ Wamount ×

C amount (i ) N

∑C j =1

amount

( j)

Where: Cint (i ) = competitive advantage of interest for participant i Wint = weight factor competitive advantage of interest C amount (i ) = competitive advantage of average loan amount for participant i


Wamount = weight factor competitive advantage of average loan amount N = total number of participants. The background teams are included in N .

In the instructor site the weighting factors Wint and Wamount can be filled out in the setup of the menu item “Other parameters” or the menu item “Institution”. The competitive advantage C int (i ) is calculated by the following formula, Cint (i ) = (2 × Max( Int ( j , p )) − Int (i, p )) Eint j

Where: Int ( j , p ) = interest filled out by participant j , in period p , in the decision screen. In the formula, the maximum interest of all participants j is chosen and multiplied by 2. E int = Exponential factor, which can be filled out in the setup of the menu item “Other

parameters” or the menu item “Institution”. Both Wint and E int determine the influence of interest on the allocation of clients. The competitive advantage Camount (i ) is calculated by: C amount (i ) = Am(i, p ) Eamount

Where: Am(i, p ) = average loan amount chosen by participant i in period p in the decision screen. E amount = Exponential factor, filled out in the setup menu item “Other parameters” or

menu item “Institution”. Both Wamount and E amount determine the influence of average loan amount on the allocation of clients. The formula to calculate the percentage of allocated clients Ploan ( p, i ) for a certain loan product can also be applied to deposit products. The competitive advantage, Camount (i ) , is calculated in the same way, but C int (i ) is different: C int (i ) =

1 (2 × Max( Int ( j , p )) − Int (i, p )) Eint j

In this way a higher interest will attract more clients and a lower interest results in less clients. In the formula of the percentage of allocated clients Ploan ( p, i ) , it is seen that it only depends on interest and the average amount. In the decision screen, the participant can choose the amount of staff expenses and IT investments for each period. The staff expenses and IT investments have an impact on performance. This is modelled by increasing the number of allocated clients if staff expenses or IT investments are increased, with respect to other participants. So in Ploan ( p, i ) additional terms must be added: 10


Ploan ( p, i ) = Wint ×

Cint (i ) N

+ Wamount ×

∑ Cint ( j ) C headqIT (i ) N

∑C j =1

headqIT

+ WnetwIT ×

( j)

N

+ Wstaff ×

∑ C amount ( j )

j =1

WheadqIT ×

C amount (i )

C netwIT (i )

∑C j =1

netwIT

( j)

+ WmangIT ×

+

N

∑ C staff ( j)

j =1

N

C staff (i ) j =1

C mangIT (i ) N

∑C j =1

mangIT

+ WtelcIT ×

( j)

CtelcIT (i ) N

∑C j =1

telcIT

( j)

where: C staff (i ) = competitive advantage of staff expenses for participant i Wstaff = weight factor competitive advantage of staff expenses C headqIT (i ) = competitive advantages of expenses in headquarter IT for participant i WheadqIT = weight factor competitive advantage of expenses in headquarter IT C netwIT (i ) = competitive advantage of expenses in network IT for participant i WnetwIT = weight factor competitive advantage of expenses in network IT C mangIT (i ) = competitive advantage of expenses in management IT for participant i WmangIT = weight factor competitive advantage of expenses in management IT C telcIT (i ) = competitive advantage of expenses in telecommunication IT for participant i WtelcIT = weight factor competitive advantage of expenses in telecommunication IT

The competitive advantage of staff expenses C staff (i ) is calculated by: C staff (i ) = Exp (i, p )

E stafft

Where: Exp (i, p ) = Total staff expenses chosen by participant i in period p E staff = Exponential factor

The competitive advantage of the IT expenses is calculated in the same way. The IT expenses are added to “Net property and equipment” in the balance sheet. These are depreciated on a five year basis. The total IT expenses from the balance sheet are used to calculate the competitive advantage. In this way the IT expenses in the current and previous periods contribute to the competitive advantage. For staff expenses, only the current period contributes. The weighting factors Wstaff , WheadqIT , WnetwIT , WmangIT and WtelcIT and exponential factors E staff , E headqIT , E netwIT , E mangIT and E telcIT can be filled out in the setup menu item “Other parameters” or the menu item “Institution”.

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For loan products, additional terms have to be added to Ploan ( p, i ) . These additional terms are not used for deposits, but are contributions from the fee percentage on loans, the premium percentage of life insurance, and the interest on compulsory savings. The competitive advantage of fee percentage on loans and the premium percentage of life insurance is calculated in the same way as the competitive advantage of interest on loans. The competitive advantage of compulsory savings is calculated differently. It is calculated by the same formula which is applied to the competitive advantage of the interest on deposits. The percentage of allocated clients Ploan ( p, i ) must always be 100%. If we sum this up for all participants: N

Ptot = ∑ Ploan ( p, i ) = 100% j =1

In some cases, the weights Wamount , Wint , etc can be chosen such that Ptot differs from 100%. To avoid this problem, a correction is carried out, where each percentage of allocated clients Ploan ( p, i ) is divided by Ptot : Pcorrection ( p, i ) =

Pcorrection ( p, i ) Ptot

In that case the sum of corrected percentages is always 100%: N

∑P j =1

correction

( p, i ) = 100%

In the simulation, we always use the corrected percentages.

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3: INTEREST SHORT-TERM DEPOSITS General introduction / Role in Simfi This formula is used to calculate the interest charges on three-month short term deposits entrusted to the MFI. The three-month deposits serve as an example for all short term and long term borrowed funds, which behave in a similar way.

Where? Financial statement > Profit and loss (P&L) > Total financial expenses > Interest and fee expenses > For client deposits

Definitions Deposits: money entrusted by the MFI’s clients to the bank, at a fixed interest rate and for a fixed period. Usually, deposits denote larger amounts. Borrowed funds: financing obtained from other banks and financial institutions at a fixed interest rate and for a fixed period. Typically, these are larger amounts.

Formula

Input data Monthly Interest Rate Deposits: this percentage is given on a monthly basis to make the calculations simpler. Monthly interest rates can be converted to annual interest rates using the following formula:

The interest is calculated on a monthly basis. So, within a three month reporting period of the simulation, three interest calculations are carried out. However, the interest does not accrue. The interest amount does not vary and stays with the deposit cohort until redemption. The interest is due at the end of the month and is calculated before the deposit pay-back takes place. Pay back rate: this pay-back rate is determined by the duration of the deposit. On threemonth deposits, 1/3 of the principal is paid back at the end of the month.

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Calculations At the end of the month, the amount subject to interest charges is calculated after deduction of redemptions. Example Deposits Started Deposits 1JanQ1 Deposits 1JFebQ1 Deposits 1JMarQ1 Total New Contracts

1JanQ1

31JanQ1

1FebQ1

28FebQ1

1MarQ1

31MarQ1

Totals 1,000.00

1,000.00 500.00

1,000.00

500.00

500.00

1,500.00

1,500.00

1,500.00

3,000.00

Table 2: Three deposit cohorts starting at the first of each month

We consider one decision period of a quarter, or three months. Every month, a new Deposit cohort is initiated. In order to show the transgression from one month to the next, the first and last dates of the months are listed separately. Deposits 1JanQ1 Deposits 1JFebQ1 Deposits 1JMarQ1

Monthly Interest 2.00% 3.00% 1.00%

Monthly Redemption 33.33% 33.33% 33.33%

Table 3: Monthly interest and redemptions

At the end of every month, the pay-back amount or redemption is calculated. Redemption Deposits 1JanQ1 Deposits 1JFebQ1 Deposits 1JMarQ1 Totals

1JanQ1

31JanQ1 333.33

1FebQ1

28FebQ1 333.33

333.33

1MarQ1

31MarQ1 333.33

Totals 1,000.00

166.67

166.67

333.33

500.00

500.00 1,000.00

500.00 1,833.33

Table 4: Three Deposit cohorts starting at the first of each month

For instance, the amount in table 3 under Deposits1JanQ1, at the end of January, equals 333.33. This pay-back amount is calculated by taking the initial Deposit amount of 1,000.00 and dividing this number by three.

Since the interest amount is calculated before pay-back, we arrive at the following overview of the amounts, subjected to interest charges at the end of the month.

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Subject to Interest charge Deposits 1JanQ1 Deposits 1JFebQ1 Deposits 1JMarQ1

1JanQ1

31JanQ1 1,000.00

1FebQ1

28FebQ1 666.67 500.00

1MarQ1

31MarQ1 333.33 333.33 1,500.00

Table 5: Amounts subject to interest charges at the end of the month

For the cohort Deposits1JanQ1 the amount for 31JanQ1 is just the 1,000.00 For the cohort Deposits1JanQ1, the amount for 28FebQ1 can be calculated by subtracting the redemption for January. The redemption for February is not taken into account yet, since the interest is calculated before pay-back.

The same goes for the amount on 31MarQ1, with two redemptions to account for:

Finally, we can calculate the actual interest by multiplying the amount subject to interest charge by the interest rate. Just a reminder: the interest rate is fixed and stays with the Deposit cohort. Interest charged Deposits 1JanQ1 Deposits 1JFebQ1 Deposits 1JMarQ1 Totals

1JanQ1

31JanQ1 20.00

1FebQ1

20.00

28FebQ1 13.33

1MarQ1

31MarQ1 6.67

Totals 40.00

15.00

10.00

25.00

28.33

15.00 31.67

15.00 80.00

Table 6: Interest charged at the end of the month

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4: INTEREST SHORT-TERM INDIVIDUAL LOAN General introduction / Role in Simfi This formula is used to calculate the interest charges on short term loans of three months, given to the MFI´s clients. Although the math is straightforward, the actual calculation might present some difficulties. The three-month loan serves as an example for all short term and long term loans that behave in a similar way.

Where? Decisions/Summary decision>Assets>Product design Financial statement>Profit and loss (P&L)>Total financial income>Interest and fee income from loan portfolio>Cash interest Detailed portfolio>Short term loans Detailed portfolio>Long term loans

Formula The formula is simple enough:

Input data Monthly Interest Rate Individual Loans: this amount is given on a monthly basis to make the calculations simpler. Monthly interest rates can be converted to annual interest rates using the following formula:

The interest is calculated on a monthly basis. So, within a three month reporting period of the simulation, three interest calculations are carried out. However, the interest does not accrue. The interest amount does not vary and stays with the loan cohort till redemption. The interest is due at the end of the month and is calculated before the loan pay-back takes place. However, defaulted loans do not pay interest. Probability of default (per year) individual loans: this rate is given on a yearly basis. Annual PDs can be converted to monthly PDs using the following formula:

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Defaults take place at the end of the month. No interest will be calculated or paid for defaulted loans. Pay back rate: this pay-back rate is determined by the duration of the loan. On threemonth loans, 1/3 of the principal is paid back at the end of the month.

Calculations At the end of the month, the amount subject to interest charges is calculated after the deduction of defaults and redemptions. This becomes complicated for the paybacks, since previous defaults have to be compensated for. Loans Started Loans 1JanQ1

1JanQ1

31JanQ1

1FebQ1

28FebQ1

31MarQ1

1,000.00

Totals 1,000.00

Loans 1JFebQ1

1,000.00

1,000.00

Loans 1JMarQ1 Total New

1MarQ1

1,000.00

1,000.00

1,000.00

1,000.00

1,000.00

3,000.00

Table 7: Three loan cohorts starting at the first of each month

We consider one decision period of a quarter or three months. Every month, a new loan cohort of 1,000.00 is initiated, in order to show the transgression from one month to the next one. The first and last dates of the months are listed separately Loans 1JanQ1 Loans 1JFebQ1 Loans 1JMarQ1

Monthly Interest 1.00% 1.00% 1.00%

Monthly Redemption 33.33% 33.33% 33.33%

Table 8: Monthly interest and redemptions

The interest calculation excludes the loans that have defaulted. The defaulted loan amounts are given in the table below: Defaults Loans 1JanQ1 Loans 1JFebQ1 Loans 1JMarQ1 Totals

1JanQ1

31JanQ1 50.00

1FebQ1

28FebQ1 50.00 50.00

50.00

1MarQ1

100.00

31MarQ1 50.00 50.00 50.00 150.00

Totals 150.00 100.00 50.00 200.00

Table 9: Defaults occur at the end of each month (data are given and not calculated)

At the end of every month, the pay-back amount or redemption is calculated. Redemption Loans 1JanQ1 Loans 1JFebQ1 Loans 1JMarQ1 Totals

1JanQ1

31JanQ1 316.67

1FebQ1

316.67

28FebQ1 291.67 316.67 608.33

1MarQ1

31MarQ1 241.67 291.67 316.67 850.00

Table 10: Three loan cohorts starting at the first of each month

For instance, the amount in table 4 under Loans1JanQ1 at the end of January equals 316.67. This pay-back amount is calculated by taking the initial loan amount of 1,000.00, subtracting the default of 50.00 that occurred on 31JanQ1 and dividing this by three.

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Totals 850.00 608.33 316.67 1,775.00


If we move to the next month, to 28FebQ1, the calculation becomes as follows:

The intuitive reasoning behind these factors, is that for the default that occurred in January for the Loans1JanQ1 cohort, the MFI will miss out repayment on three occasions: the end of January, February, and March. For that reason the loss needs to be divided by three. The default occurring in February for Loans1JanQ1 cohort can only be deducted on two months: February and March, since January has already passed. Therefore, this factor is then divided by two. Following the same reasoning, defaults occurring in March for the Loans1JanQ1 cohort will be divided by just one.

Since the interest amount is calculated before pay-back, but after deduction of the defaults, we arrive at the following overview of the amounts subject to interest charges at the end of the month. Subject to Interest charge Loans 1JanQ1 Loans 1JFebQ1 Loans 1JMarQ1

1JanQ1

31JanQ1 950.00

1FebQ1

28FebQ1 583.33 950.00

1MarQ1

31MarQ1 241.67 583.33 950.00

Table 11: Amounts subject to interest charges at the end of the month

For the cohort Loans1JanQ1, the amount for 31JanQ1 is just the 1,000.00 outstanding, minus the 50.00 default.

For the cohort Loans1JanQ1, in finding out the amount for 28FebQ1, the defaults for January and February need to be subtracted as well as the redemption for January. The February redemption is not taken into account yet, since the interest is calculated before pay-back.

The same goes for the amount on 31MarQ1, with three defaults of 50.00 and two redemptions to account for:

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Finally, we can calculate the actual interest by multiplying the amount subject to interest charge by the interest rate. Just a reminder: the interest rate is fixed and stays with the loan cohort. Interest charged Loans 1JanQ1 Loans 1JFebQ1 Loans 1JMarQ1 Totals

1JanQ1

31JanQ1 9.50

1FebQ1

9.50

28FebQ1 5.83 9.50 15.33

1MarQ1

31MarQ1 2.42 5.83 9.50 17.75

Totals 17.75 15.33 9.50 42.58

Table 12: Interest charged at the end of the month

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5: INTEREST SHORT-TERM GROUP LOAN General introduction / Role in Simfi This formula is used to calculate the interest charges on short term loans of three months, given to the MFI´s clients. Although the math is straightforward, the actual calculation might present some difficulties. The three-month loan serves as an example for all short term and long term loans that behave in a similar way.

Where? Decisions/Summary decision>Assets>Product design Financial statement>Profit and loss (P&L)>Total financial income>Interest and fee income from loan portfolio>Cash interest Detailed portfolio>Short term loans Detailed portfolio>Long term loans

Formula The formula is simple enough:

Input Data Monthly Interest Rate Group Loans: this amount is given on a monthly basis to make the calculations simpler. Monthly interest rates can be converted to annual interest rates using the following formula:

The interest is calculated on a monthly basis. So, within a three month reporting period of the simulation, three interest calculations are carried out. However, the interest does not accrue. The interest amount does not vary and stays with the loan cohort till redemption. The interest is due at the end of the month and is calculated before the loan pay-back takes place. However, defaulted loans do not pay interest. Probability of default (per year) group loans: this rate is given on a yearly basis. Annual PDs can be converted to monthly PDs using the following formula:

Defaults take place at the end of the month. No interest will be calculated or paid for defaulted loans. 20


Pay back rate: this pay-back rate is determined by the duration of the loan. On threemonth loans, 1/3 of the principal is paid back at the end of the month.

Calculations At the end of the month, the amount subject to interest charges is calculated after the deduction of defaults and redemptions. This becomes complicated for the paybacks, since previous defaults have to be compensated for. Loans Started Loans 1JanQ1

1JanQ1

31JanQ1

1FebQ1

28FebQ1

31MarQ1

Totals 1,000.00

Loans 1JFebQ1

1,000.00

1,000.00

Loans 1JMarQ1 Total New

1MarQ1

1,000.00

1,000.00

1,000.00

1,000.00

1,000.00

1,000.00

3,000.00

Table 13: Three loan cohorts starting at the first of each month

We consider one decision period of a quarter or three months. Every month, a new loan cohort of 1,000.00 is initiated, in order to show the transgression from one month to the next one. The first and last dates of the months are listed separately. Loans 1JanQ1 Loans 1JFebQ1 Loans 1JMarQ1

Monthly Interest 1.00% 1.00% 1.00%

Monthly Redemption 33.33% 33.33% 33.33%

Table 14: Monthly interest and redemptions

The interest calculation excludes the loans that have defaulted. The defaulted loan amounts are given in the table below: Defaults Loans 1JanQ1 Loans 1JFebQ1 Loans 1JMarQ1 Totals

1JanQ1

31JanQ1 50.00

1FebQ1

28FebQ1 50.00 50.00

50.00

1MarQ1

100.00

31MarQ1 50.00 50.00 50.00 150.00

Totals 150.00 100.00 50.00 200.00

Table 15: Defaults occur at the end of each month (data are given and not calculated)

At the end of every month, the pay-back amount or redemption is calculated. Redemption Loans 1JanQ1 Loans 1JFebQ1 Loans 1JMarQ1 Totals

1JanQ1

31JanQ1 316.67

1FebQ1

316.67

28FebQ1 291.67 316.67 608.33

1MarQ1

31MarQ1 241.67 291.67 316.67 850.00

Table 16: Three loan cohorts starting at the first of each month

For instance, the amount in table 4 under Loans1JanQ1 at the end of January equals 316.67. This pay-back amount is calculated by taking the initial loan amount of 1,000.00, subtracting the default of 50.00 that occurred on 31JanQ1 and dividing this by three.

21

Totals 850.00 608.33 316.67 1,775.00


If we move to the next month, to 28FebQ1, the calculation becomes as follows:

The intuitive reasoning behind these factors, is that for the default that occurred in January for the Loans1JanQ1 cohort, the MFI will miss out repayment on three occasions: the end of January, February, and March. For that reason the loss needs to be divided by three. The default occurring in February for Loans1JanQ1 cohort can only be deducted on two months: February and March, since January has already passed. Therefore, this factor is then divided by two. Following the same reasoning, defaults occurring in March for the Loans1JanQ1 cohort will be divided by just one.

Since the interest amount is calculated before pay-back, but after deduction of the defaults, we arrive at the following overview of the amounts subject to interest charges at the end of the month. Subject to Interest charge Loans 1JanQ1 Loans 1JFebQ1 Loans 1JMarQ1

1JanQ1

31JanQ1 950.00

1FebQ1

28FebQ1 583.33 950.00

1MarQ1

31MarQ1 241.67 583.33 950.00

Table 17: Amounts subject to interest charges at the end of the month

For the cohort Loans1JanQ1, the amount for 31JanQ1 is just the 1,000.00 outstanding, minus the 50.00 default.

For the cohort Loans1JanQ1, in finding out the amount for 28FebQ1, the defaults for January and February need to be subtracted as well as the redemption for January. The February redemption is not taken into account yet, since the interest is calculated before pay-back.

The same goes for the amount on 31MarQ1, with three defaults of 50.00 and two redemptions to account for:

Finally, we can calculate the actual interest by multiplying the amount subject to interest charge by the interest rate. Just a reminder: the interest rate is fixed and stays with the loan cohort. Interest charged

1JanQ1

31JanQ1

1FebQ1

28FebQ1

1MarQ1

31MarQ1

Totals 22


Loans 1JanQ1 Loans 1JFebQ1 Loans 1JMarQ1 Totals

9.50

5.83 9.50

9.50

15.33

2.42 5.83 9.50 17.75

17.75 15.33 9.50 42.58

Table 18: Interest charged at the end of the month

23


6: CALCULATION OF TOTAL PORTFOLIO FOR SAVINGS General introduction / Role in Simfi This section explains how savings are allocated over clients in the SIMFI.

Where? Financial statement > Balance sheet > Liabilities > Current liabilities > Short term time deposits (< 1 year) Financial statement > Balance sheet > Liabilities > Long term liabilities > Long term time deposits > 1 year Financial statement > Projected balance > Liabilities > Current liabilities > Short term time deposits (< 1 year) Financial statement > Projected balance > Liabilities > Long term liabilities > Long term time deposits > 1 year Detailed portfolio > Short term deposits > Short term time deposits < 1 year Detailed portfolio > Long term deposits > Long term time deposits > 1 year

Calculations Participant i gets a percentage Psaving ( p, i ) of total clients NC ( p ) . The number of clients allocated to participant i is used to determine the new savings portfolio in period p . In the decision screen, the participant fills out the average savings amount. Each client does not have the same savings amount. His savings amount Amreal (i, p ) is determined by: Amreal (i, p ) = Am(i, p ) + Rand × Var ( p ) × Am(i, p )

Where: Amreal (i, p ) = Real savings amount Am(i, p ) = Average savings amount Rand = Random number between -1 and 1 Var ( p ) = Variation percentage with respect to average savings amount

In the menu item “Market information”, within submenu “Other parameters” the Var ( p ) can be filled in for each deposit- and savings product.

24


The new savings are added to the total savings portfolio in the balance sheet. The total original amount and the amount outstanding for each savings product can be found under menu item “Detailed portfolio” in the participant site. The repayments are subtracted from the total amount outstanding. In the menu item “Detailed portfolio”, in the participant site, the outstanding amount TotOutst end ( p ) has been calculated for each savings product separately. In the balance sheet TotOutst end ( p ) is determined for the total savings portfolio of short term time deposits and long term time deposits. TotOutst begin ( p ) and TotOutst end ( p ) are calculated in the same way as for loans, but without the possibility of default, so that: TotOutst end ( p ) = TotOutst begin ( p ) − TotPayb( p )

Where: TotPayb( p ) is the total amount paid back by the institution, because a saving is a liability. Each new amount is paid back by a constant amount each month or quarter. This constant amount is equal to the contract amount, divided by the total months or quarters of the contract period.

25


7: CALCULATION OF TOTAL PORTFOLIO FOR LOANS General introduction / Role in Simfi This section explains how loans are allocated over clients in SIMFI.

Where? Financial statement > Balance sheet > Net loan portfolio>Gross loan portfolio (principal outstanding) Financial statement > Projected balance > Net loan portfolio > Gross loan portfolio (principal outstanding) Detailed portfolio > Short term loans Detailed portfolio > Long term loans

Calculations Participant i gets a percentage Ploan ( p, i ) of the total individual clients NC indv ( p ) and a percentage Ploan ( p, i ) of the group clients’ total NC group ( p ) . The number of individual- and group clients allocated to participant i is used to determine the new loan portfolio for period p . In the decision screen, the participant fills out the average loan amount. Each client does not have the same loan amount. His loan amount Amreal (i, p ) is determined by: Amreal (i, p ) = Am(i, p ) + Rand × Var ( p ) × Am(i, p )

Where: Amreal (i, p ) = Real loan amount Am(i, p ) = Average loan amount Rand = Random number between -1 and 1 Var ( p ) = Variation percentage with respect to average loan amount

In the menu item “Market information”, within submenu item “Other parameters”, Var ( p ) can be filled in for each deposit and loan product. The new loans are added to the total loan portfolio in the balance sheet. The total original amount and the amount outstanding for each loan product can be found in the menu item “Detailed portfolio”, in the participant site. The repayments are subtracted from the total amount outstanding. 26


For each loan product there is a chance that the client is not able to pay back his remaining loan amount. This probability of default PDreal ( p ) is determined in the same way as Amreal (i, p ) , PDreal ( p ) = PD( p ) + Rand × Var ( p ) × PD( p )

Where: PDreal ( p ) = Real probability of default PD( p ) = Predicted probability of default Rand = Random number between -1 and 1 Var ( p ) = Variation percentage with respect to predicted probability of default PD( p ) and Var ( p ) can be filled out for individual- and group loans under the menu item “Market information”, within submenu item “Other parameters” Var ( p ) . PDreal ( p ) is used to determine for each contract if a default takes place during its maturity and in which month or quarter it will take place. To make these predictions we need PDreal ( p ) for the current period and future periods. In the menu item “Market information”, PD( p ) and Var ( p ) cannot be filled out for past periods, because this could influence the calculations for the current and future periods. Besides PD( p ) and Var ( p ) , other past variables cannot be modified either.

The total chance of default for a loan during maturity is, TotPD ( p) = PD( p) + (1 − PD( p)) × PD( p + 1) + (1 − PD( p)) × (1 − PD( p + 1)) × PD( p + 2) + (1 − PD( p)) × (1 − PD( p + 1)) × (1 − PD( p + 2)) × PD( p + 3) + ......etc

The first term is the probability that the default takes place in the current period p . In the next period p + 1 a default takes place (chance = PD( p + 1) ) if in period p there is no default (chance = 1 − PD( p ) ). So, the second term in the formula is the probability of default in period p + 1 , predicted in period p . The third and next terms can be explained in the same way. In the simulation, in each period, random numbers between 0 and 1 are used to determine the period in which a default takes place, see also the chapter ‘Portfolio at Risk (PAR)’. If the random number is smaller than PD( p ) , the loan will default in period p . If the loan survives in period p , another random number is used for the next period p + 1 . That random number is compared with PD( p + 1) , to see if the loan will survive period p + 1 . If a default takes place, the remaining loan amount is added to the portfolio at risk, see also the ‘chapter Portfolio at Risk (PAR)’. 27


In the menu item “Detailed portfolio”, in the participant site, the outstanding amount TotOutst end ( p ) has been calculated for each loan product separately. In the balance sheet, TotOutst end ( p ) is determined for the total loan portfolio. In each period p , the total outstanding loan amount TotOutst ( p ) is calculated. At the beginning of the period p , it is calculated as, TotOutst begin ( p ) = TotOutst end ( p − 1) + TotNew( p ),

Where: TotOutstbegin ( p ) = Total amount outstanding at the beginning of period p TotOutst end ( p − 1) = Total amount outstanding at the end of previous period p − 1 , which is zero at the start of the simulation TotNew( p ) = Total amount of new contracts for period p Each loan contract is paid back by a constant amount in each month for the short term loans and in each quarter for the long term loans. This constant amount is equal to the contract amount, divided by the number of months or quarters of the maturity of the loan. For defaulted loan contracts, the remaining loan amount is not paid back.

The total outstanding loan amount TotOutst end ( p ) at the end of period p is calculated as: TotOutst end ( p ) = TotOutst begin ( p ) − TotDef ( p ) − TotPayb( p ) + PortR ( p )

Where: TotDef ( p ) = Total defaulted amount put in “Portfolio at risk” TotPayb( p ) =Total amount paid back. This amount has been corrected for defaulted loans PortR ( p ) =Total amount of (remaining) loans that have been put in portfolio at risk, see chapter ‘Portfolio at Risk (PAR)’

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8: PORTFOLIO AT RISK & PORTFOLIO QUALITY General introduction / Role in Simfi Portfolio at Risk (PAR) is a standard international measure of portfolio quality that measures the portion of a portfolio which is deemed at risk because payments are overdue. So, PAR is the proportion of the loan portfolio that has an increased default risk.

Where? In the Simfi simulation, the amount of loans outstanding can be found on the balance sheets under Gross loan portfolio outstanding. This is the sum of the various loan products which can be found under Short term loans individual, Short term loans groups, Long term loans individual and the Long term loans groups in the Detailed portfolio. Currently, the numerator cannot be derived from the balance sheet.

Definitions Determining defaults A probabilistic process determines whether or not a loan defaults. Every month, the dice are cast and the simulation determines, per loan, whether a default occurs. Defaults are the defaults that have occurred in the period preceding the PAR analysis. Currently, the PD (probability of default) is divided by twelve to get a monthly PD. The simulation generates a random number, and If that random number is smaller than the threshold monthly PD, a default occurs. The time period considered, is either the duration of the loan, or a one year timeframe, in case the loan has a remaining duration of over twelve months. In case multiple defaults are registered for various months within the duration of the loan, the first occurrence is taken into consideration, and the other later defaults are ignored. The approach above takes two shortcuts: 1. The monthly PD is assumed to be 1/12 of the annual PD. This results in small errors. 2. The default events occurring throughout the remaining duration of the loan or the one year period are assumed to be independent. In reality, they are dependent in since a default can only happen if no default occurred in the previous months Both issues will be fixed by using the following calculation that is not based on the PD but on the chance that the loan survives, so: (1-PD). The monthly PD can be calculated through 1-(1-B3)^(1/12) and the monthly PD is made dependent on the PD of previous months. This is done by modelling the survival rate, which is the complement of the PD, and can be calculated as (1-PD). 29


Whenever a default occurs, the loans follow the flowchart depicted in figure 1. The PAR workflow

Figure 1: Process flow in case of default

At this point in time, the complete remaining loan amount is classified as loans outstanding with a default. Although the amount of loans outstanding with a default in reality includes all of the loans on which an arrear occurred in the repayment of the principal amount as well as the interest payments, the Simfi simulation assumes that there are no interest arrears. So, defaulted loans are exempt from interest calculation and payment. Even if defaulted loans recover, the interest due for the period the loan was under water is ignored. Rescheduled loans The first branching is between rescheduling and the various PAR time categories. Rescheduling occurs in practice whenever special conditions apply, which urge the MFI to reconsider the loan agreement conditions. The MFI has the option to renegotiate the contract and reschedule the loan. These loans are visible under the heading Rescheduled (no current arrears).Personal circumstances such as illness and the passing away of a family member account for this category. The trainer can adjust the Percentage rescheduled loans in the set-up screens and under the menu Institutions. The rescheduled loans are included in the PAR. At the quarter, the amount under rescheduled loans is recalculated: 1. The rescheduled loan can recover (see below) 2. The rescheduled loan can be written off definitely 3. The rescheduled loan stays put in the PAR under rescheduled loans. At the start of each quarter, an inflow of rescheduled loans occurs with the new batch of defaulted loans. Time bins The loans under PAR that are not renegotiated will end up in a chain of PAR bins or time categories: 1. PAR 1-30 days 2. PAR 31-60 days 3. PAR 61-90 days 30


4. PAR 91-180 days 5. PAR 181-365 days 6. PAR > 365 days. Monthly PAR categories Default does not necessarily result in a complete non-payment of the loan, since loans can recover. Although, in the simulation, the calculations are run on a quarterly base, the model takes into consideration the roll-over of the defaulted loans on a per-month basis. This is necessary, since the granularity of the PAR categories is a month for the first three bins. This results in a complex calculation, as at the end of every month events such as recovery and write-off can occur. The loans that stay put move from one bin to the next as time progresses. For the first three categories at the end of the month, there are three options: 1. The loan recovers 2. The loan is written off 3. The loan moves to the next category. Non-monthly PAR categories Once the troubled credit arrives in the fourth bin (PAR 91-180 days), there is a fourth option: the loan remains stationary within the PAR category. This is possible as the PAR bin covers more than one simulation period. The same goes for all following PAR categories. For the bins PAR 91-180 and PAR 181-365, the PAR calculation is done at the end of each quarter and there is no need to take the monthly roll-over into consideration, as was necessary for the lower PAR categories. At the end of each quarter, an evaluation takes place for the age of the various credits. Only those loans that have reached the full time limit of the time category they are in, are selected for either: 1. Recovery; 2. Write off, or 3. Moving to the next bin. The loans that have not reached the time limit of the bin remain untouched. The loans in the last bin (PAR > 365 days), are evaluated on a quarterly basis with the following options: 1. Recovery; 2. Write off, or 3. Staying put. Overview Bins

Recovery rate

Write-off rate

PAR 1-30 PAR 31-60 PAR 61-90 PAR 91-180 PAR 181-365 PAR >365 PAR Rescheduled

Monthly Monthly Monthly Quarterly Biannually Quarterly Quarterly

Monthly Monthly Monthly Quarterly Biannually Quarterly Quarterly

Staying put After 1 month No option No option No option Option Option Option Option

Time limit One month One month One month One quarter Two quarters No limit No limit

Figure 2: Wrapping up PAR categories

Dynamic maximum rates for PD and Recovery The simulation contains a formula to cap the maximum PD and recovery percentages in such a way that the sum of the two never exceeds 100%. So, regardless of the maximum 31


values the trainer has entered, the simulation might overrule these input values. The check is done dynamically which means that the maximum changes every period. How to interpret PAR? PAR is not only a gauge for the overall portfolio quality, but also provides an indicator of the size of the default amount in the case things go wrong. 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. Of course, these percentages might be different for each MFI and geographical area. There is caveat with the interpretation of PAR. A sudden up or downswing of the loan intake can have a high impact on the PAR. The reason is that the numerator of the PAR ratio stays constant, while, in the case of an aggressive loan expansion policy, the denominator will increase as loans are given out. Just looking at the PAR would suggest a rapid improvement of credit quality, which is not the case. The other way round: putting on the brakes in the lending process will lead to an increase in the PAR percentage. Can participants influence the PAR? Participants can hardly influence the PAR in the decision making process. The PD, recovery, and write-off percentages are set by the trainer and are part of the economic scenario. The only choice participants have is between Group loans and Individual loans which might have different PD characteristics. The simulation has made Group loans optional for the trainee and Individual loans mandatory. Another tool at the disposal of the participant is the Write-off policy, Write-off PAR + 365 days overdue. Trainees might for instance decide for a 100% write-off of loans in this category. This will lead to an improvement of the PAR. The losses, however, will be channelled through the Loan loss reserves and eventually the profit.

Formula PAR can be calculated in the following way: Amount of loans outstanding with a repayment overdue / Amount of loans outstanding Although this calculation is straightforward, the actual calculation in Simfi is complex.

Portfolio Quality Loan loss reserve ratio is the ratio between the total loan loss reserve and the average gross loan portfolio:

32


This ratio indicates if the loan loss reserve is sufficient with respect to the total loan portfolio outstanding. The ratio should be of the same order of magnitude as the loan loss ratio which will be explained later on. Loan loss reserves: Financial statement > Balance sheet Gross loan portfolio: Financial statement > Balance sheet The risk coverage ratio is the ratio between the total loan loss reserve and portfolio at risk including PAR 30 and PAR Rescheduled:

This ratio indicates if the loan loss reserve is sufficient with respect to the portfolio at risk. The ratio should be of the same order of magnitude as the portfolio at risk write-off index which will be explained later on. Loan loss reserves: Financial statement > Balance sheet PAR 30: Ratio>Portfolio quality PAR Rescheduled: Ratio>Portfolio quality Gross loan portfolio: Financial statement > Balance sheet The provision expense ratio (annualised) is the ratio between the loan loss provision expenses and the average gross loan portfolio:

Loan loss provision expenses: Financial statement > Profit and loss (P&L) Gross loan portfolio: Financial statement > Balance sheet The loan loss ratio (annualised) is the ratio between the total amount which is written off from all PAR categories and the average gross loan portfolio:

This ratio is an indicator to see whether the loan loss reserve ratio is sufficient. Total amount written off: Market information>Main parameters> Loans (not available for trainees) Gross loan portfolio: Financial statement > Balance sheet The portfolio at risk write-off index (annualised) is the ratio between the total amount which is written off from all PAR categories and the total portfolio at risk (all categories):

33


The ratio can be considered as the degree of riskiness of the total portfolio at risk and can be used as an indicator to see whether the risk coverage ratio is sufficient. Total amount written off: Market information>Main parameters> Loans (not available for trainees) PAR Rescheduled: Ratio>Portfolio quality Gross loan portfolio: Financial statement > Balance sheet

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9: PERFORMANCE RATIOS: PROFITABILITY ANALYSIS AND SUSTAINABILITY General introduction Accounting and financial ratios are numerical relationships based on financial data in the financial reports of a MFI. In Simfi, the following groups of ratios are covered: 1. 2. 3. 4. 5.

Variations to the previous quarter Portfolio quality (Portfolio at Risk or PaR) Efficiency and productivity Financial structure Profitability analysis and sustainability

The Profitability analysis and sustainability pertain mainly to data present on the balance sheet and profit & loss statement of the MFI.

Role in Simfi Ratios are used to draw comparisons with competitors, industry standards, and previous periodsâ&#x20AC;&#x2122; results of the MFI itself. The profitability analysis and sustainability ratios show to what extent the business of the MFI is viable and sustainable. For this purpose, the costs and returns are monitored and compared with the assets and equity on the balance sheet of the MFI.

Where? Ratio > Profitability analysis and sustainability

Profitability analysis Net Margin This shows what is left from the total financial income of the MFI, after deduction of interest paid and operational expenses.

Obviously, the higher the net margin, the better. Net income: Financial statement > Profit and loss (P&L) Total financial income: Financial statement > Profit and loss (P&L) 35


Interest margin (annualised) Interest margin measures the net interest and fee income from the loan portfolio, divided by the average gross loan portfolio.

Since in the simulation many loan agreements expire at the end of a quarter, the amount on the balance sheet does not give a complete picture. For that reason, the average of the current quarter and the previous quarterâ&#x20AC;&#x2122;s balance amounts is taken. The net interest and fee income pertains to just one quarter. In order the get the annual number, the ratio is multiplied by four. The higher the interest margin, the more profitable the MFI is. Total interest and fee income from loan portfolio: Financial statement > Profit and loss (P&L) > Interest and fee income from loan portfolio Interest and fee expenses: Financial statement > Profit and loss (P&L) Gross loan portfolio: Financial statement > Balance sheet > Net loan portfolio Operating margin The operating margin consists of the Net operating margin divided by the Total financial income. Operating margin is a profitability ratio and allows for comparison of MFIs of different sizes.

The higher the operating margin, the better. Net operating margin: Financial statement > Profit and loss (P&L) Total financial income: Financial statement > Profit and loss (P&L) Net financial margin The net financial margin consists of the Net financial margin divided by Total financial income. Net financial margin is a profitability ratio and allows for comparison of MFIs of different sizes. The net financial margins shows what is left of the Total financial income after taking out expenses such as interest, loan loss provisions etc.

The higher the Net financial margin, the better. Net financial margin: Financial statement > Profit and loss (P&L) Total financial income: Financial statement > Profit and loss (P&L Cost ratio Operating expenses divided by net financial margin. The cost ratio shows which part of the financial margin is taken away by the operating expenses. 36


The lower the cost ratio, the better. Operating expenses: Financial statement > Profit and loss (P&L) Net financial margin: Financial statement > Profit and loss (P&L) Cost-to-income ratio Operating expenses divided by net interest and fee income (from loans, investments, deposits and funds). The cost-to-income ratio shows a MFIâ&#x20AC;&#x2122;s costs in relation to its income.

The ratio gives an idea of how efficiently the MFI is being run. The lower the ratio, the more profitable the MFI will be. Operating expenses: Financial statement > Profit and loss (P&L) Total financial income: Financial statement > Profit and loss (P&L) Total financial expenses: Financial statement > Profit and loss (P&L) Other operating income: Financial statement > Profit and loss (P&L) > Net financial margin (after provisions) Cost of client deposits This ratio expresses the costs related to the MFI clientsâ&#x20AC;&#x2122; deposits and can be calculated by dividing the interest and fee expenses for the deposits by the average amount of these deposits.

Since, in the simulation, many deposits are withdrawn at the end of a quarter, the amount on the balance sheet does not give a complete picture. For that reason, the average of the current quarter and the previous quarterâ&#x20AC;&#x2122;s balance amounts is taken. Time and demand deposits of the previous quarter consist of: Short term deposits, Long term time deposits, and Demand deposits. The same items are called upon for the current quarter. The lower the costs of client deposits, the better it is for the MFI. Demand deposits: Financial statement > Balance sheet > Liabilities > Current liabilities Short term time deposits: Financial statement > Balance sheet > Liabilities > Current liabilities Long term time deposits: Financial statement > Balance sheet > Liabilities > Current liabilities For client deposits: Financial statement > Profit and loss (P&L) > Total financial expenses > Interest and fee expenses 37


Costs of borrowed funds Interest and fee expenses for borrowed funds divided by total average amount of borrowed funds. Borrowed funds pertain to loans obtained from other banks, and for that reason they include quasi capital accounts.

Borrowed funds consist of: Short term borrowed funds, Long term borrowed funds, and Quasi capital accounts. Since in the simulation many borrowed funds agreements expire at the end of a quarter, the amount on the balance sheet does not give a complete picture. For that reason, the average of the current quarter and the previous quarterâ&#x20AC;&#x2122;s balance amounts is taken. The lower the costs of borrowed funds, the better. Short term time deposits: Financial statement > Balance sheet > Liabilities > Current liabilities Long term time deposits: Financial statement > Balance sheet > Liabilities > Long term liabilities Quasi capital accounts: Financial statement > Balance sheet > Liabilities > Long term liabilities For borrowed funds: Financial statement > Profit and loss (P&L) > Total financial expenses > Interest and fee expenses Funding expense ratio Interest and fee expenses for deposits, funds, and other financial expenses divided by total average gross loan portfolio outstanding. This ratio shows what the costs of funding are to the MFI.

Since in the simulation many loans expire at the end of a quarter, the amount on the balance sheet does not give a complete picture. For that reason, the average of the current quarter and the previous quarterâ&#x20AC;&#x2122;s balance amounts is taken. The lower the funding expense ratio, the better. For client deposits: Financial statement > Profit and loss (P&L) > Total financial expenses > Interest and fee expenses For borrowed funds: Financial statement > Profit and loss (P&L) > Total financial expenses > Interest and fee expenses Other financial expenses: Financial statement > Profit and loss (P&L) > Total financial expenses 38


Gross loan portfolio: Financial statement > Balance sheet > Assets > Net loan portfolio Sustainability Return on equity (ROE) Return on equity shows how much profit investors are making on their investment. To make comparisons easier, the number is annualised. In the simulation the P&L provides quarterly figures, so it is assumed that the annual profit equals the last quarter’s profit times four. In order to show the development of the equity position throughout the quarter, rather than just giving a snapshot at the end of a period, the average is taken of the end of the quarter positions of the previous and current quarter.

The higher the ROE, the better. Net income: Financial statement > Profit & Loss (P&L) Total equity: Financial statement > Balance sheet Return on equity (ROE) excluding donations Return on equity shows how much profit investors are making on their investment. The reason to exclude donations, is to get a picture of the sustainability of the MFI without donor support. To make comparisons easier, the number is annualised. In the simulation, the P&L provides quarterly figures, so it is assumed that the annual profit equals the last quarter’s profit times four. The same goes for the donations which are also annualised. In order to show the development of the equity position throughout the quarter, rather than just a snapshot at the end of a period, the average is taken of the end of the quarter positions of the previous and current quarter.

The higher the ROE excluding donations, the better. Net income: Financial statement > Profit & Loss (P&L) Donations: Financial statement > Profit & Loss (P&L) Net income before donations Total equity: Financial statement > Balance sheet

Return on assets (ROA) Return on assets shows how much profit the MFI is making on the assets at its disposal. To make comparisons easier, the number is annualised. In the simulation, the P&L provides quarterly figures, so it is assumed that the annual profit equals the last quarter’s profit times four. In order to show the development of the asset position throughout the quarter, rather than just a snapshot at the end of a period, the average is taken of the end of the quarter positions of the previous and current quarter.

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The higher the ROA, the better. Net income: Financial statement > Profit & Loss (P&L) Total assets: Financial statement > Balance sheet Return on assets (ROA) excluding donations Return on assets shows how much profit the MFI is making on the assets at its disposal. The reason to exclude donations, is to get a picture of the sustainability of the MFI without donor support. To make comparisons easier, the number is annualised. In the simulation the P&L provides quarterly figures, so it is assumed that the annual profit equals the last quarterâ&#x20AC;&#x2122;s profit times four. The same goes for the donations which are also annualised. In order to show the development of the asset position throughout the quarter, rather than just a snapshot at the end of a period, the average is taken of the end of the quarter positions of the previous and current quarter.

The higher the ROA excluding donations, the better. Net income: Financial statement > Profit & Loss (P&L) Donations: Financial statement > Profit & Loss (P&L) Net income before donations Total assets: Financial statement > Balance sheet Operational self-sufficiency Donors and MFI management use this benchmark to assess how far an MFI has come in covering its operating expenses with its operating income. The ratio shows to what extent the operating expenses are covered by the operating income.

The lower the Operating self-sufficiency the better. Numbers below 100% are considered good. Operating expenses: Financial statement > Profit and loss (P&L) Total financial expenses: Financial statement > Profit and loss (P&L) Loan loss provision expenses: Financial statement > Profit and loss (P&L) > Loan loss reserves 40


Total financial income: Financial statement > Profit and loss (P&L) Other operating income: Financial statement > Profit and loss (P&L) > Net financial margin (after provisions)

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9.1: RATIOS: FINANCIAL STRUCTURE General introduction Accounting and financial ratios are numerical relationships based on financial data in the financial reports of a MFI. In Simfi, the following groups of ratios are covered: 1. 2. 3. 4. 5.

Variations to the previous quarter Portfolio quality (Portfolio at Risk or PaR) Efficiency and productivity Profitability analysis and sustainability Financial structure

The financial structure pertains mainly to data present on the balance sheet of the MFI.

Role in Simfi Ratios are used to draw comparisons with competitors, industry standards, and previous years’ results of the MFI itself. The financial structure ratios cover the earning capacity, liquidity, solvency, and equity structure.

Where? Ratio > Financial structure

Earning capacity of assets Net portfolio / total assets

This ratio shows to what extent the assets are put to work for lending purposes, which is the core business of a MFI. The net loan portfolio excludes the loan loss reserves, which are, in bookkeeping terms, already ‘lost’ for the MFI. The higher this ratio, the better the MFI works toward its lending targets. Net loan portfolio: Financial statement > Balance sheet > Net loan portfolio Total assets: Financial statement > Balance sheet > Total assets

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Non-earning assets / total assets

This ratio shows to what extent the assets are deployed for purposes that do not produce earnings. It should be the aim of the MFI to keep this percentage low. The non-earning assets are the sum of Cash on hand, Non-interest bearing deposits and clearing accounts, Prepaid expenses, Accounts receivable, Other current assets, Net property and equipment, Other long term assets. The lower this ratio, the more the MFI is working toward its lending targets. Cash on hand: Financial statement > Balance sheet > Current assets Non-interest bearing deposits and clearing accounts: Financial statement > Balance sheet > Current assets Prepaid expenses: Financial statement > Balance sheet > Current assets Accounts receivable: Financial statement > Balance sheet > Current assets Other current assets: Financial statement > Balance sheet > Current assets Net property and equipment: Financial statement > Balance sheet > Long term assets Other long term assets: Financial statement > Balance sheet > Long term assets Total assets: Financial statement > Balance sheet

Solvency Capital adequacy

The Capital adequacy ratio shows to what extent the balance sheet total is financed through equity. Although the Quasi capital accounts do not belong to the equity proper, they are, given their long term and subordinated nature, considered to have almost equity status. The higher this percentage, the more stable the MFI is. Total equity: Financial statement > Balance sheet Quasi capital accounts: Financial statement > Balance sheet Total assets: Financial statement > Balance sheet

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Leverage

The Leverage ratio shows the proportion between equity capital and debt. The lower this percentage, the more stable the MFI is. Total liabilities: Financial statement > Balance sheet Total equity: Financial statement > Balance sheet Working capital Working capital measures the liquidity available for operating purposes. It is the difference between current assets and current liabilities. Commonly, the time horizon for the calculation of working capital is one year. However, for the MFIs, with many commitments of three months or less, the time horizon is set at one quarter.

The time horizon could also be set at one year, which will change the formula to:

The higher this amount, the more liquid the MFI is. The data to calculate the working capital on a quarterly basis are not available to the trainees. However, on a yearly basis the data can, with some trouble, be retrieved from the balance sheet. Cash on hand: Financial statement > Balance sheet > Current assets Non-interest bearing deposits and clearing accounts: Financial statement > Balance sheet > Current assets Interest bearing deposits and clearing accounts < 1 year: Financial statement > Balance sheet > Current assets: Financial statement > Balance sheet > Current assets Prepaid expenses: Financial statement > Balance sheet > Current assets Accounts receivable Interest receivable: Financial statement > Balance sheet > Current assets Other current assets: Financial statement > Balance sheet > Current assets

Liquidity Liquidity Liquidity indicates to what extent the MFI can meet its short term obligations. In the simulation, short term is defined as a quarter rather than a year.

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A ratio above 100% is considered to be acceptable. The higher the ratio, the more liquid the MFI is. The data to calculate this ratio are not available on the balance sheet but can be calculated using two other ratios: Average current assets: Ratio > Financial structure > Liquidity Average current liabilities: Ratio > Financial structure > Liquidity Average current assets These cannot be calculated by the trainee with the information available on the balance sheet. The reason for showing the average number, rather than using the balance sheet is that within the simulation at the end of the quarter many loans expire or start. Measuring liquidity at this ‘hectic’ moment would not provide a realistic view of the liquidity position. Average current liabilities These cannot be calculated by the trainee with the information available on the balance sheet. The reason for showing the average number, rather than using the balance sheet is that, within the simulation, at the end of the quarter many loans expire or start. Measuring liquidity at this ‘hectic’ moment would not provide a realistic view of the liquidity position.

Liability composition Total client deposits / Total liabilities This ratio measures to what extent the banks debts are covered by clients’ deposits.

In general, the higher this ratio the better, since this makes the MFI less exposed to external financing. Demand deposits: Financial statement > Balance sheet > Current liabilities Short term time deposits: Financial statement > Balance sheet > Current liabilities Long term time deposits: Financial statement > Balance sheet > Long term liabilities Total liabilities: Financial statement > Balance sheet

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Borrowed funds / Total liabilities Borrowed funds refer to loans obtained from other banks and financial institutions.

If this ratio is high, the MFI is dependent on other financial institutions.

Short term borrowed funds: Financial statement > Balance sheet > Current liabilities Long term borrowed funds: Financial statement > Balance sheet > Long term liabilities Quasi capital accounts: Financial statement > Balance sheet > Long term liabilities Current liabilities / Total liabilities This ratio expresses how much of the liabilities are short term. In this case, short term is less than one year.

In general, it is better for a bank to keep this ratio low since long term funding is more stable. Demand deposits : Financial statement > Balance sheet > Current liabilities Short time deposits: Financial statement > Balance sheet > Current liabilities Short time borrowed funds: Financial statement > Balance sheet > Current liabilities Interest payable: Financial statement > Balance sheet > Current liabilities Other short term liabilities: Financial statement > Balance sheet > Current liabilities Total liabilities: Financial statement > Balance sheet

Gross loan portfolio / total clients deposits Gross loan portfolio / total clients deposits This ratio shows to what extent the loans outstanding are covered by funding through the MFIâ&#x20AC;&#x2122;s own client base.

In general, the lower this ratio is, the better, because it demonstrates financial independence of the MFI. Gross loan portfolio: Financial statement > Balance sheet Demand deposits: Financial statement > Balance sheet > Current liabilities Short term time deposits: Financial statement > Balance sheet > Current liabilities Long term time deposits: Financial statement > Balance sheet > Long term liabilities

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Donated equity / total equity Donated equity / total equity This ratio shows to what extent the equity has been funded through donations, usually stemming from development cooperation initiatives.

The lower the ratio, the more independent the MFI and the local economy are. Donated equity: Financial statement > Balance sheet > Equity Total equity: Financial statement > Balance sheet

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9.2: RATIOS: PRODUCTIVITY

EFFICIENCY

AND

General introduction Accounting and financial ratios are numerical relationships based on financial data in the financial reports of a MFI. In Simfi, the following groups of ratios are covered: 1. 2. 3. 4. 5.

Variations to the previous quarter Portfolio quality (Portfolio at Risk or PaR) Financial structure Profitability analysis and sustainability Efficiency and productivity

The Efficiency and productivity ratios pertain mainly to data present on the profit & loss statement and balance sheet of the MFI and the composition of the staff.

Role in Simfi Ratios are used to draw comparisons with competitors, industry standards, and previous periodsâ&#x20AC;&#x2122; results of the MFI itself. The ratios in this chapter cover the efficiency and productivity of the MFI.

Where? Ratio > Efficiency and productivity

Portfolio yield Total interest and fee income of the loan portfolio: this amount is calculated as a percentage of total average gross loan portfolios outstanding. This ratio is annualised.

The portfolio yield ratio shows how productive the portfolio is. In general, the higher the ratio, the more productive the MFI is. Interest and fee income from loan portfolio: Financial statement > Profit and loss (P&L) Gross loan portfolio > Financial statement > Balance sheet 48


Operating expense ratio Total operating costs calculated as a percentage of the total average gross loan portfolio outstanding. Operating cost are personnel and administration cost. This ratio is annualised.

The operating expense ratio shows the size of the costs compared to the size of the lending business of the MFI. The lower this ratio, the more productive the MFI is. Operating expenses: Financial statement > Profit and loss (P&L)e5 Gross loan portfolio > Financial statement > Balance sheet

Portfolio rotation Total value newly disbursed loans calculated as a percentage of total average gross loan portfolios outstanding. This ratio is annualised.

The ratio shows how good the MFI is at finding new business for its lending activities. The higher this ratio, the more active the MFI is. Newly disbursed loans > Cannot be obtained from the information available. Gross loan portfolio > Financial statement > Balance sheet

Average disbursed loan size Total value newly disbursed loans divided by total number of newly disbursed loans.

This ratio gives an idea of the average size of the loans given out. Total value newly disbursed loans > Cannot be obtained from the information available. Total number of newly disbursed loans > Cannot be obtained from the information available.

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Cost per loan Total operating expenses divided by total of number loan contracts which are not expired.

This gives an indication of the costs of the remaining loans. The lower the costs per loan, the better. Operating expenses: Financial statement: Profit and loss (P&L) Number of short term loans 3M individual: Detailed portfolio > Short term loans Number of short term loans 6M individual: Detailed portfolio > Short term loans Number of short term loans 9M individual: Detailed portfolio > Short term loans Number of short term loans 12M individual: Detailed portfolio > Short term loans Number of short term loans 3M group: Detailed portfolio > Short term loans Number of short term loans 6M group: Detailed portfolio > Short term loans Number of short term loans 9M group: Detailed portfolio > Short term loans Number of short term loans 12M group: Detailed portfolio > Short term loans Number of long term loans 2Y individual: Detailed portfolio > Long term loans Number of long term loans 5Y individual: Detailed portfolio > Long term loans Number of long term loans 2Y group: Detailed portfolio > Long term loans Number of long term loans 5Y group: Detailed portfolio > Long term loans

Composition and numbers of staff Numbers and percentages of top managers, middle managers and other staff cannot be retrieved from the screen. Moreover, there are no specific formulas and calculations necessary barring simple summations.

Number of active loans per loan officer Total number of loan contracts which are not expired divided by the total number of loan officers.

This number cannot be calculated by the participants.

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Number of active loans per staff member Total number of loan contracts which are not expired divided by the total number of staff members.

This number cannot be calculated by the participants.

Credit staff as % of staff Number of loan officers calculated as a percentage of all staff members

This number cannot be calculated by the participants.

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10: CASH ON HAND AND OTHER SHORT TERM LIABILITIES ON BALANCE SHEET General introduction Cash on hand is the most liquid item on the asset side of the balance sheet.

Role in Simfi In Simfi, Cash on hand, together with Other short term liabilities on the liability side, are used to balance the balance sheet.

Where? These items can be found under: 1. Financial statement > Balance Sheet > Current assets 2. Financial statement > Balance Sheet > Current liabilities

Discussion The sums of the asset and liability sides of the balance sheet always need to maintain equilibrium. Whenever this equilibrium is lost, these two balance sheet items serve as stopgaps to restore the balance. In case the sum of the liability side exceeds the total amount of the asset side, cash on hand is adjusted in such a way that equilibrium is reached. On the other hand, if the asset side exceeds the liability side, the item â&#x20AC;&#x2DC;Other short term liabilitiesâ&#x20AC;&#x2122; is adjusted. It is impossible to have negative amounts for either of these items. Furthermore, if one of the two items has a positive value, i.e. higher than zero, the other must be zero, and the other way round.

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11: LEGAL STRUCTURE AND EQUITY General introduction Simfi offers three types of legal structures: 1. Mutual structure 2. NGO (Non-Governmental Organisation) 3. Stock company. Basically, a mutual MFI is owned by its members. The equity is split up in: 1. Reserves/retained earnings/accumulated losses 2. Paid up share capital, which is fed by a contribution of 10.00 monetary units from each new customer. Each new loan or deposit contract is considered as one new customer. An NGO is a legally constituted organisation that is created independent of the government and is not run as a conventional profit company. The equity of an NGO consists of: 1. Donated equity, which is usually provided by a donor organisation 2. Reserves/retained earnings/accumulated losses. For a commercial stock company the equity consists of: 1. Paid-up share capital, which is contributed by shareholders 2. Donated equity, which is usually provided by a donor organisation. However, for a stock company the default value is zero, unless the trainer decides differently 3. Reserves/retained earnings/accumulated losses.

Role in Simfi The role in Simfi is to explain the various legal structures to the participants and to show the advantages and disadvantages of each of these structures.

Where? Paid-up share capital: Financial statement>Balance sheet>Equity Reserves/retained earnings/accumulated losses: Financial statement>Balance sheet>Equity Donated equity: Financial statement>Balance sheet>Equity

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Choice of structure The trainer sets the original structure for the first round. This can be a mutual structure, an NGO, or a stock company. During the simulation, teams have the option to upgrade its legal structure, where only the following two moves are allowed: 1. From mutual structure to stock company 2. From NGO to stock company. Please note that an upgrade cannot be reversed. For the upgrade toward a stock company, a one-off expense is charged, under Extraordinary expenses, in the Profit and loss statement. This amount is set by the trainer, but the default value is set to 25,000 monetary units.

Dividends and shares One of the main advantages for a stock company is that the capital base can be extended. This will have a positive effect on the solvency of the organisation. Also, it is easier to extend the working capital of the MFI. The stock company cannot reduce the number of shares outstanding, or buy back its own shares. Drawback for a stock company is that dividends have to be paid to the shareholders. The dividend rate is part of the participantsâ&#x20AC;&#x2122; decision input. The participants may opt for reducing the dividend rate to zero. However, this would lead to an unrealistic situation where stock companies issue equity without paying dividends. In order to discourage such policies, the amount of capital outstanding is made dependent on dividend policy.

Equity and dividend The amount of issued shares will be reduced depending on dividend policy. The average dividend percentage, over the course of the stock companyâ&#x20AC;&#x2122;s existence, is calculated for all teams, including the background teams:

Those quarters in which the institution has not been a stock company, are ignored in the calculation of the average dividend rate. The highest dividend rate, among teams, is the benchmark. For each team the average dividend rate is compared with this benchmark. The percentage of real sold shares becomes:

The real amount of issued shares that will be added to the paid-up share capital in the balance sheet is: 54


The percentage of real sold shares in the formula above is independent of the state of the economy. To approximate reality even closer, the formula is corrected by an additional factor, only when the number of active clients in the current quarter has become less than the number of active clients in quarter 0. In which case the percentage of real sold shares is multiplied by:

The calculation of the number of active clients is explained in detail in chapter 1: â&#x20AC;&#x2DC;Number of Clientsâ&#x20AC;&#x2122;. The total paid dividend is booked in other financial expenses, in the income statement. The dividend percentage filled in by the trainee is yearly-based, so the total paid dividend per quarter is:

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12: DEPRECIATION & INFLATION General introduction In the Simfi simulation, there are several long term assets, subjected to depreciation, which are: 1. Headquarter for 50,000 fixed, depreciation rate 4% 2. Equipment for 25,000 fixed, depreciation rate 4% 3. IT Investments-variable depending on participantsâ&#x20AC;&#x2122; decisions, depreciation rate 20% The amounts for headquarter and equipment are hard-coded in the simulation and cannot be set by the trainer. The same goes for the depreciation rates. The depreciation expenses are booked under administrative expenses, in the profit and loss statement.

Role in Simfi Deprecation and inflation affect the value of long term assets and equity

Where? Administrative expenses: Financial statement > Profit and loss > Operating expenses Inflation adjustments: Financial statement > Profit and loss > Non-operating expenses Net property and equipment: Financial statement > Balance sheet > Long term assets

Depreciation Depreciation rates are set on an annual basis. The depreciation expenses are charged on a quarterly basis. The value of the asset at the end of the quarter is calculated in the following way:

The 0.25 power expresses that this is a quarterly rate. The actual depreciation can be calculated by subtracting the current quarter from the previous quarter:

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Value at beginning of quarter

Depreciation

Q0

50,000.00

0

Q1

49,492.32

507.68

Q2

48,989.79

502.53

Q3

48,492.37

497.42

Q4

48,000.00

492.37

Depreciation Rate 4%

Investment For the participants it is possible to make investments in IT. These investments will lead to a competitive advantage in the acquisition of new business. The investments should be taken into account for depreciation. It is assumed that the investments take place at the beginning of the quarter, in which the investment decision is made and the depreciation is calculated for the complete quarter. The asset value is increased with the value of the investment. New Investment Q0

-

Value at beginning of quarter 25,000.00

Depreciation

Depreciation Rate

Q1

5,000.00

28,372.25

1,627.75

Q2

-

26,832.82

1,539.43

Q3

-

25,376.91

1,455.91

Q4

-

24,000.00

1,376.91

0

20%

6,000.00

Inflation Inflation is included in the simulation and affects the value of long term assets. The inflation rate is set by the trainer. Inflation has the following effects in the simulation: 1. The value of long term assets increases with the inflation rate 2. The value of equity increases with the inflation rate. The inflation rate leads to an increase in the value of long term assets as follows:

If we ignore the depreciation, inflation has the following effect on the value of long term assets:

Value start quarter Q0

-

Value end quarter ignoring depreciation

Depreciation Rate

Depreciation

25,000.00

0

Q1

25,000.00

25,124.07

-

Q2

25,124.07

25,248.76

-

Q3

25,248.76

25,374.07

-

Q4

25,374.07

25,500.00

-

20%

Inflation Rate 2%

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Negative inflation rates, or deflation, cannot occur in the simulation. If the asset value increases, equity will increase with a similarly. This gain is booked not only in the balance sheet, but also in the profit and loss statement under inflation adjustment, as negative costs, or income. Without long term assets, equity also increases due to inflation. This is a different kind of inflation correction which should not be confused with the inflation correction, due to the increase in value of long term assets. If the equity value increases (not due to inflation of long term assets), this increment should not only show up in the balance sheet, but also in the profit and loss statement. The increase in monetary value is booked in the balance sheet under reserves / retained earnings /accumulated losses. In order to neutralize this inflation gain, an additional cost of the same monetary value is incurred in the profit and loss statement, under Inflation adjustment. This will reduce the profit and the effect on the balance sheet is neutralized. Note that all long term assets are consolidated under the balance sheet item â&#x20AC;&#x2DC;net property and equipmentâ&#x20AC;&#x2122;.

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13: BONUSES AND PENALTIES General introduction In order to steer the decision making of the MFI toward being sensible and realistic, a number of bonuses and penalties have been added to the simulation. The bonuses pertain to the following investments: 1. Investments in human resources 2. Investments in IT 3. Investments in loan officers. The general idea is that these investments will help the MFI to recover easier, once loans fall to distress. The penalties occur when regulatory requirements havenâ&#x20AC;&#x2122;t been met: 1. Not having enough lending activities 2. Sudden jumps in strategy toward average loans size. 3. Not enough cash with respect to the total amount of assets

Role in Simfi The role in Simfi is mainly to encourage sensible management by the MFIs. Moreover, these penalties and bonuses prevent participants from outsmarting the simulation by making decisions that are far from realistic.

Where? The following bonuses and penalties can be adjusted by the trainer: Bonus competitive advantage: Institution>Impact parameters on probability of recovery Setup>Other parameters> Impact parameters on probability of recovery Penalty regulatory requirements: Institution>Additional regulation category requirements Setup>Regulation>Regulation categories Setup>Regulation>Additional regulation category requirements Penalty insufficient lending activity: Institution>Other parameters Setup>Other parameters>Other parameters

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Penalty for jumps in loan size: No adjustment possible Penalty for not enough cash with respect to the total amount of assets: No adjustment possible

Bonuses & competitive advantage A proper investment and human resources policy leads to higher recovery rates for the MFI, for the loans in the portfolio at risk (PAR) and the rescheduled loans. The competitive advantage is calculated by setting the highest investment among teams as a benchmark. This benchmark results in a weighting factor of 100%. The other teams get a weighting factor derived from this benchmark. For example:

There are similar competitive advantages for investments and for the number of loan officers. Apart from these competitive weighting factors, the trainer can set an impact weighting factor that shifts the weight from one factor to another. The default settings for these impact weights are 0.50%.

The result of the formula above is a percentage, which is added as percentage points to the recovery rate.

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Penalty regulatory requirements In case the MFI does not meet the regulatory requirements, there is a penalty of a 2% point increase in the interest rate of the following liabilities: 1. Short term borrowed funds 2. Long term borrowed funds 3. Quasi capital accounts. This penalty is incurred in the following cases: 1. The minimum cash of total deposits percentage is not met 2. The capital adequacy ratio is insufficient 3. The liquidity ratio is insufficient. The minimum capital adequacy and liquidity ratios are set by the trainer and depend on the MFI’s regulation type.

Penalty insufficient lending activity In order to encourage the MFI to allocate its funds toward lending rather than investing elsewhere, there is a penalty if the following balance sheet items combined exceed a limit: 1. Interest bearing deposits and investments < 1 year 2. Investments > 1 year. The limit is set by the trainer as a percentage of the total gross loan portfolio. The penalty is also determined by the trainer as a percentage of the sum of point 1) and 2), above.

Penalty for jumps in loan size In order to discourage MFIs from changing the average loan size too abruptly, there is a penalty if any of the loan sizes in one round exceed a change of more than 25%. The penalty is an increase of the probability of default for all lending activities, with one percentage point in the current quarter and next quarters. So, even if a trespassing of the 25% limit only took place for one type of loan, all loans will still be confronted with a higher PD.

Penalty for not enough cash with respect to the total amount of assets In order to encourage the MFI to have enough cash, there is a penalty if in the balance sheet the amount of cash is less than 1% of the total amount of assets. The penalty amount is 1% of the total assets which could have a large impact on the net profit in the P&L statement. In the P&L statement this amount is booked in “Other financial expenses” under header “Total financial expenses”. During initialisation this penalty is always zero, see also chapter 26 “Initialisation”. 61


14: OVERVIEW OF MATURITIES, LOANS, INVESTMENTS, FUNDS AND DEPOSITS General introduction / Role in Simfi For the following products, the following durations are available: Short-term loans: 3, 6, 9, and 12 months Long-term loans: 2 and 5 years Short-term deposits: 3, 6, 9, and 12 months Long-term deposits: 2 years Demand deposits: 10 years Short-term borrowed funds: 3, 6, 9, and 12 months Long-term borrowed funds: 7 years Quasi-capital accounts: 10 years Short-term investments: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, and 12 months Long-term investments: 2, 3, 4, and 5 years

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15: REGULATION LEVEL

General introduction The participants can select a regulation level for their MFIs. Each level comes with its own requirements and advantages. The higher the regulation level, the more rights the MFI is entitled to.

Role in Simfi The regulation level offers the MFI the possibility to differentiate in the competitive landscape.

Where? These regulatory items can be found under: 1. Institution > Regulation categories 2. Institution > Additional regulation category requirements 3. Decision > Other > Institution's structure and equity > Regulation status

Levels The Simfi simulation includes the following levels: 1. 2. 3. 4.

Level 1: Capital Adequacy Ratio (CAR) minimum 0% and liquidity ratio 25% Level 2: Capital Adequacy Ratio (CAR) minimum 4% and liquidity ratio 50% Level 3: Capital Adequacy Ratio (CAR) minimum 8% and liquidity ratio 100% Level 4: Capital Adequacy Ratio (CAR) minimum 12% and liquidity ratio 125%.

For all levels, there is a 1% cash requirement with respect to the total amount of deposits. The requirements for the various levels are set by the trainer. An MFI can only migrate from a lower to a higher level and once an MFI has moved up, it is not possible to demote to a lower level. Migration to a higher level is not possible if the regulation requirements for the corresponding higher level are not yet met. Moreover, after a migration to a higher regulation level, the MFI is kept at this level for at least the next three periods. The costs associated with a migration to a higher regulation level are set by the trainer and amount to 25,000 monetary units by default. These expenses are booked in the profit and loss statement, under extraordinary expenses. 63


It is possible to migrate to more than one level under the same costs. If the regulation requirements of the current level are not met, the interest cost on funding is increased, see chapter 13 Bonuses and Penalties.

Entitlements The various levels provide the following rights and entitlements: 1. 2. 3. 4.

Level 1: No deposits Level 2: Compulsory savings become available Level 3: Level 2 & short and long time deposits become available Level 4: Level 3 & demand deposits become available

Group loans The MFI has the option to include or exclude group loans. There are no costs associated with this option. Once a choice has been made, the MFI cannot change this choice for the next four periods.

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16: CALCULATION SALARY General introduction / Role in Simfi The salary is calculated using the trainee’s input from the ‘Decision input’ screen. Here, the trainee can fill in the salaries for the top managers, middle managers and loan officers. Furthermore, he or she can fill in the number of branches. The head quarter has 25 loan officers, 5 middle managers and 2 top managers. Every branch has 2 middle managers and 5 loan officers. These numbers cannot be changed by the trainer. The running cost consists of, for example, rent, electricity and other fixed costs, which are booked under ‘administrative expenses’ in the P&L. Here the write-off costs are also booked. The running cost is calculated as a fixed percentage of the total gross loan portfolio. This percentage is found under the menu item ‘Institution’. Here, as well as in the setup screen, the trainer may edit this percentage. In the trainer site, the trainee may click on the menu item ‘Projected balance’. This is the balance of the upcoming quarter, if the trainee doesn’t submit any loans or deposits, doesn’t issue any shares and doesn’t loan or invest. The projected balance for period 1, pertains to the(projected) balance for period 2.

Formula For example the trainee could fill in: Salary loan officers 525 Salary middle manager 800 Salary top manager 2000 Number of branches 6 Total head quarter salary = 25 X 525 + 5 X 800 = 2 X 2000 = 21125 Total branch salary = (5X 525 + 2 X 800) X 6 = 25350 Total salary = 21125 + 25350 = 46475

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17: CALCULATION RUNNING COSTS General introduction / Role in Simfi The running cost consists of, for example, rent, electricity and other fixed costs, which are booked under ‘administrative expenses’ in the P&L. Here the write-off costs are also booked, see also chapter 11 “Depreciation & Inflation”. The running cost is calculated as a fixed percentage of the total gross loan portfolio. This percentage is found under the menu item ‘Institution’. Here, as well as in the setup screen, the trainer may edit this percentage.

Where? Institution>Other parameters>Running cost (percentage of gross loan portfolio) Set up>Other parameters>Other parameters>Running cost (percentage of gross loan portfolio) Financial statement>Profit and loss (P&L)>Operating expenses> Administrative expenses

Example Running cost (percentage of gross loan portfolio): 25% Gross loan portfolio Team 1 1000000 Team 2 2000000 Team 3 1000000 Team 4 2000000 Team 5 1000000 Team 6 2000000 Team 7 1000000 Team 8 2000000 Background team 1000000

Running cost 250000 500000 250000 500000 250000 500000 250000 500000 250000

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18: PROJECTED BALANCE General introduction / Role in Simfi In the trainee site, the trainee might click on the menu item ‘Projected balance’, which is the balance for the upcoming quarter, if the trainee (hypothetically) doesn’t submit any loans or deposits, doesn’t issue any shares and doesn’t loan or invest. The salary expenses are the same as in the previous quarter, but IT investments are zero in the upcoming quarter. For example, the projected balance for quarter 1 pertains to the balance for period 2.

Where? Financial statement>Projected balance

Example As an example we show you how the portfolio amount of short term time deposits of maturity 3 months is calculated for the current and projected balance, see also chapter 6 “Calculation of Total Portfolio for Savings”. Quarter Month Total amount new contracts

Q1 M1 1000

M2 500

M3 1500

Q2 (projected balance) M1 M2 M3 0 0 0

Table 19: Total amount of new contracts

In the calculations below the results of Q2 correspond to the results in the projected balance of Q1. Calculation portfolio Q1 Calculation portfolio at the end of month 1: Total portfolio at the beginning of month 1: Payback end of month 1, 1000/3: Total portfolio at the end of month 1:

1.000,00 333,33 666,67

Calculation portfolio at the end of month 2: Total portfolio at the end of month 1: Total amount of new contracts at the beginning of month 2: Total portfolio at the beginning of month 2: Payback end of month, 1000/3 + 500/3: Total portfolio at the end of month 2:

666,67 500,00 1.166,67 500,00 666,67 67


Calculation portfolio at the end of month 3: Total portfolio at the end of month 2: 666,67 Total amount of new contracts at the beginning of month 3: 1.500,00 Total portfolio at the beginning of month 3: 2.166,67 Payback end of month 3, 1000/3 + 500/3+1500/3: 1.000,00 Total portfolio at the end of month 3: 1.166,67 Calculation portfolio Q2 (projected balance) Calculation portfolio at the end of month 1: Total portfolio at the end of month 3 in Q1: Total amount of new contracts at the beginning of month 1: Total portfolio at the beginning of month 1: Payback end of month 1, 500/3+1500/3: Total portfolio at the end of month 1:

1.166,67 0,00 1.166,67 666,67 500,00

Calculation portfolio at the end of month 2: Total portfolio at the end of month 1: 500,00 Total amount of new contracts at the beginning of month 2: 0,00 Total portfolio at the beginning of month 2: 500,00 Payback end of month, 1500/3: 500,00 Total portfolio at the end of month 2: 0,00 Calculation portfolio at the end of month 3: Total portfolio at the beginning of month 3: Total amount of new contracts at the beginning of month 3: Total portfolio at the beginning of month 3: Payback end of month 3, nothing: Total portfolio at the end of month 3:

0,00 0,00 0,00 0,00 0,00

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19: SHOCKS General introduction / Role in Simfi The effect of the shock “natural diseases” has already been explained in the first chapter of this document. The shock “new competitors” will increase the number of background teams by a factor 1.5. The number of background teams can be filled out in setup under, ‘Other parameters’, or under the menu item “Institution”. These background teams are participants of the simulation whose input in the decision screen is filled out in the setup screen, under ‘Decision input at T0’ during initialisation and in the menu item “Background teams” after initialisation. The shock “new competitors” will yield more participants. So, when the loan clients and deposits clients are divided, each participant will have fewer clients. In the second chapter, it was explained how each participant can attract more clients by, for example, increasing IT-expenses. The shock “regulation modifications” will change the requirements for upgrades to a higher regulation level. In setup under ‘Regulation’ or under the menu item “Institution”, the minimum capital adequacy ratio and minimum liquidity ratio is filled out for regulation levels 1, 2, 3 and 4. The shock “regulation modifications” will increment each minimum capital adequacy ratio by 1% and each minimum liquidity ratio by 5%. The shock “customer protection rules” will fix the interest rate for loan and deposit products for each participant. This means that, after this, each player will not be able to choose interest rates for loans and deposits in the decision input screen anymore. These are fixed at default values. Input of these interest rates by the participant are automatically set equal to the default values in the calculation. This shock may be chosen by the instructor only once. Once it is chosen, the new regulation cannot be changed during the rest of the simulation. The other three shocks can be chosen more than once. The shock "Customer" is not only applied to interest of loans and deposits, but also to premium life insurance, fee percentage on loans, fee on money transfers and interest on compulsory savings.

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20: LIFE INSURANCE General introduction / Role in Simfi Under the Decision input screen, provided that the trainer has made the choice available, Life insurance can be determined. This is a one-time premium a customer can additionally apply for when taking out a loan. This is insurance for a customerâ&#x20AC;&#x2122;s passing away, in which case any outstanding payments are covered. The premium is a percentage of the total loan, and is paid for at the same time the loan is applied for. In the cutting cake formula, the total amount of issued customers slightly depends on the determined premium percentage. The higher this percentage, the lesser the amount of issued clients. The impact parameters for this premium may be chosen by the trainer.

Formula The total yield for life insurance = the total amount of newly issued loans X the premium percentage These yields are booked under â&#x20AC;&#x2DC;other operating income (non-extraordinary)â&#x20AC;&#x2122;, in the P&L menu item.

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21: MONEY TRANSFER General introduction / Role in Simfi The trainer has the option to include the Money transfer option in the simulation game. Once this feature is enabled, the MFIs receive extra revenue from their clients’ money wires.

Where? Institution>Exponential factor on … Institution>Weighting factor on … Setup>Other parameters>Exponential factor on … Setup>Other parameters>Weighting factor on … Market information>(Main parameters>)Macro-economy>Average amount money transfer Decisions>Assets>Fee percentage money transfer Financial statement>Profit and loss (P&L)>Net financial margin (after provisions)> Other operating income (non-extraordinary)

Calculations For money transfers, the number of allocated clients depends on the fee percentage. The cutting cake formula is applied to calculate the number of allocated clients, see also chapter 2: ‘Cutting the Cake: Allocation of Clients to Participants’. In chapter 2, it is explained how the cutting cake formula is applied to loans and deposits. The application to money transfers is a little bit different, because there is no deposit or loan amount. The average amount of money transfers is not chosen by the participants and does not influence the number of allocated clients. It only depends on the fee percentage, staff expenses and IT investments. If a participant chooses a lower fee percentage than other participants, his service is more attractive, resulting in a higher number of clients. The percentage of allocated clients Ptrans ( p, i) of participant i , depends on the fee percentage calculated by the following formula: Ptrans ( p, i ) = Wtrans ×

C trans (i ) N

∑C j =1

trans

( j)

Where: 71


Ctrans (i) = competitive advantage of fee for participant i Wtrans = weight factor competitive advantage of fee N = total number of participants. The background teams are included in N .

In the instructor site, the weighting factor Wtrans can be filled out in the setup of the menu item “Other parameters” or the menu item “Institution”. The competitive advantage Ctrans (i) is calculated by the following formula:

Ctrans (i ) = (2 × Max( Fee( j, p)) − Fee(i, p)) Etrans j

Where:

Fee( j, p) = fee percentage filled out by participant j , in period p , in the decision screen. In the formula, the maximum fee percentage of all participants j is chosen and multiplied by 2. Etrans = Exponential factor, which can be filled out in the setup of menu item “Other parameters” or the menu item “Institution”. Both Wtrans and Etrans determine the influence of fee percentage on the allocation of clients. In the formula of the percentage of allocated clients Ptrans ( p, i) , it is seen that it only depends on fee percentage. In the decision screen, the participant can choose the amount of staff expenses and IT investments for each period. These staff expenses and IT investments have an impact on performance, which is modelled by increasing the number of allocated clients if staff expenses or IT investments are increased, with respect to other participants. So, in Ptrans ( p, i) additional terms must be added:

Cint (i )

Ptrans ( p, i ) = Wint ×

N

∑C j =1

WheadqIT ×

CheadqIT (i ) N

∑C j =1

WmangIT ×

headqIT

CmangIT (i ) j =1

mangIT

( j)

N j =1

amount

CnetwIT (i )

+ WnetwIT ×

N

∑C j =1

+ WtelcIT ×

Camount (i )

∑C

( j)

( j)

N

∑C

int

+ Wamount ×

netwIT

( j)

+ Wstaff ×

Cstaff (i ) N

∑C j =1

staff

+

( j)

+

( j)

CtelcIT (i ) N

∑C j =1

telcIT

( j)

72


Where: C staff (i) = competitive advantage of staff expenses for participant i Wstaff = weight factor competitive advantage of staff expenses C headqIT (i ) = competitive advantages of expenses in headquarter IT for participant i WheadqIT = weight factor competitive advantage of expenses in headquarter IT

C netwIT (i) = competitive advantage of expenses in network IT for participant i WnetwIT = weight factor competitive advantage of expenses in network IT C mangIT (i ) = competitive advantage of expenses in management IT for participant i WmangIT = weight factor competitive advantage of expenses in management IT

CtelcIT (i) = competitive advantage of expenses in telecommunication IT for participant i WtelcIT = weight factor competitive advantage of expenses in telecommunication IT The competitive advantage of staff expenses C staff (i) is calculated by:

C staff (i ) = Exp(i, p)

Estafft

Where:

Exp(i, p) = Total staff expenses chosen by participant i in period p E staff = Exponential factor The competitive advantage of the IT expenses is calculated in the same way. The IT expenses are added to “Net property and equipment” in the balance sheet. These are depreciated on a five year basis. The total IT expenses from the balance sheet are used to calculate the competitive advantage. In this way, the IT expenses in the current and previous periods contribute to the competitive advantage. For staff expenses, only the current period contributes. The weighting factors Wstaff , WheadqIT , WnetwIT , WmangIT , WtelcIT and exponential factors E staff , E headqIT , E netwIT , E mangIT and E telcIT can be filled out in the setup menu item “Other parameters”, or the menu item “Institution”.

The percentage of allocated clients Ptrans ( p, i) must always be 100%. If we sum this up for all participants: N

Ptot = ∑ Ploan ( p, i ) = 100% j =1

73


In some cases, the weights W fee , Wstaff , etc. can be chosen such that Ptot differs from 100%. To avoid this problem, a correction is carried out where each percentage of In the simulation, we always use the corrected percentages. allocated clients Ptrans ( p, i) is divided by Ptot :

Pcorrection ( p, i ) =

Pcorrection ( p, i ) Ptot

In that case, the sum of corrected percentages is always 100%: N

∑P j =1

correction

( p, i ) = 100%

In the decision input screen, (if the instructor has made money transfers available) the participant can fill out “Fee percentage money transfer”. For each financial transaction, the bank receives a fee. In the simulation, each active client carries out one financial transaction at a certain bank. The bank to which an active client is assigned to, is determined by the cutting cake formula, which is explained in detail in this chapter. The total revenues from money transfers is calculated by the formula:

This total fee is booked in the P&L statement under “Other operating income (nonextraordinary)”.

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22: EFFECTS OF CURRENCY CHANGES General introduction Quasi capital accounts and long term borrowed funds are lent in international currency. The simulation’s output then recalculates these into local currency, where all input and output, for the trainee as well as the trainer, is expressed in local currencies. The market information screen displays all rates for all international currencies under ‘simulation currency against international reference currency’. It is up to the trainer to edit these every / any quarter. To convert a trainee’s input from quasi-capital accounts and long term borrowed funds, in the decision input screen, to international currencies, this input has to be divided by the “Simulation currency against international reference currency”. This conversion is necessary, because rates may change in future quarters. For any portfolio- and interest calculations, all new funds will first be converted to international currency. For the simulation’s output, the total portfolio and interest is again recalculated back to local currency. Because rates may go up, there’s a risk loans will become more expensive. Benefit to the trainees when the rates go down, however; for loans then go for less. Any profit or loss due to rate changes is booked under ‘exchange differences: gain/(loss)’, under P&L, which follows the following formula: Gain / Loss = (previous quarter’s rates – current quarter’s rates) X Total portfolio funds at the start of the quarter (expressed in international currency) In the simulation, the rates under market information are the rates as they were at the end of the corresponding quarter. So, if in the 2nd quarter, the rates stand at 1,5, and in the 1st quarters they stood at 1,4, the rates are 1,4 at the start of the 2nd quarter, and 1,5 at the end of it. Example Below

75


Where? Market information>(Main parameters>)Macro-economy>Simulation currency against international reference currency Financial statement>Profit and loss (P&L)> Gross financial margin > Exchange differences: gain / (loss)

76


Example In this example, the total portfolio of long term borrowed funds with a maturity of 7 years is calculated. In table 1 an overview of the necessary data is given. Total amount new contracts in local currency (input in Decision screen) One unit international currency expressed in local currency Total amount new contracts in international currency Quarterly interest rate

Quarter 1 1000

Quarter 2 500

Quarter 3 1500

1,2

0,8

1,5

833,33

625

1000

2%

3%

4%

Table 20: Overview data

Calculation portfolio at the end of quarter 1: Total portfolio at the beginning of quarter 1: Total payback end of quarter 1: Total portfolio at the end of quarter 1: Total interest at the end of quarter 1:

833,33 29,76 803,57 16,67

Calculated back to local currency (to be displayed on P&L and balance) Total portfolio at the end of quarter 1: Total interest at the end of quarter 1: Calculation portfolio at the end of quarter 2: Total portfolio at the end of quarter 1: Total amount of new contracts at the beginning of quarter 2: Total portfolio at the beginning of quarter 2: Payback from funds from quarter 1 Payback from funds from quarter 2 Total payback end of quarter 2: Total portfolio at the end of quarter 2: Interest from funds from quarter 1: Interest from funds from quarter 2: Total interest at the end of quarter 2:

964,29 20,00 803,57 625,00 1.428,57 29,76 22,32 52,08 1.376,49 19,40 15,00 34,40

Calculated back to local currency (to be displayed on P&L and balance) Total portfolio at the end of quarter 2: Total interest at the end of quarter 2: "Exchange differences: gain/(loss)" Calculation portfolio at the end of quarter 3: Total portfolio at the end of quarter 2: Total amount of new contracts at the beginning of quarter 3: Total portfolio at the beginning of quarter 3: Payback from funds from quarter 1

1.101,19 27,52 571,43 1.376,49 1.000,00 2.376,49 29,76 77


Payback from funds from quarter 2 Payback from funds from quarter 3 Total payback end of quarter 3: Total portfolio at the end of quarter 3: Interest from funds from quarter 1: Interest from funds from quarter 2: Interest from funds from quarter 3: Total interest at the end of quarter 3:

22,32 35,71 87,80 2.288,69 18,81 14,33 60,00 93,14

Calculated back to local currency (to be displayed on P&L and balance) Total portfolio at the end of quarter 3: Total interest at the end of quarter 3: "Exchange differences: gain/(loss)"

3.433,04 139,71 -1.663,54

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23: VARIATION LOAN SIZE AND DEPOSIT SIZE General introduction / Role in Simfi In the Decision input screen, the trainee can input the average loan size of short term loans and long term loans. The actual loan size of any given client differs from this average loan size (A). The trainee can also fill out the average deposit size of short term deposits, long term deposits and demand deposits. The actual deposit size is calculated in the same way with the same formula. This section discusses the calculations to achieve actual loan and deposit sizes.

Where? In the Decision input screen, the trainee can input the average loan size of short term loans and long term loans. The variation (v) of the various loan and deposit products is determined by the trainer, under menu item “Market information”, under submenu item “Other parameters”.

Formula In the Decision input screen, the trainee can input the average loan size of short term loans and long term loans. The actual loan size of any given client differs from this average loan size (A). The actual loan size (R) is determined by a random number (y) between 0 and 1 and a variation (v) that at least equals 0% and at most equals 50%. The actual loan size (R) is calculated with the formula: R = A x (1 + v x NORMSINV(y)) Where NORMSINV is the inverse of the cumulative standard normal distribution. This formula is also applied to the PD of group and individual loans, the PDs of the various PAR categories and the recovery rates of the various PAR categories. The variation of these parameters is also determined by the trainer, under menu item “Market information”, under submenu item “Other parameters”. The trainee can also fill out the average deposit size of short term deposits, long term deposits and demand deposits. The actual deposit size is calculated the same way with the same formula. The variation (v) of the various loan and deposit products is determined by the trainer in the menu item “Market information”, under submenu “Other parameters”. This variation can differ per loan or deposit product. 79


Participant i gets a percentage Ploan ( p, i ) of the total individual clients NCindv ( p) and a percentage Ploan ( p, i ) of the total group clients NC group ( p ) . The number of individual and group clients allocated to participant i is used to determine the new loan portfolio in period p . In the decision screen the participant fills out the average loan amount. Each client does not have the same loan amount. His loan amount Amreal (i, p) is determined by,

Amreal (i, p) = Am(i, p) + Rand × Var ( p) × Am(i, p) Where:

Amreal (i, p) = Real loan amount Am (i , p ) = Average loan amount Rand = Random number between -1 and 1 Var ( p ) = Variation percentage with respect to average loan amount In the menu item “Market information”, under submenu “Other parameters” Var ( p ) can be filled out for each deposit and loan product. The new loans are added to the total loan portfolio in the balance. The total original amount and the amount outstanding for each loan product can be found in the “Detailed portfolio” menu in the participant site. The repayments are subtracted from the total amount outstanding.

80


24: NUMBER OF GROUP CLIENTS General introduction In the menu item “Institution” or setup screen “Mainstream organization”, under header “Allow group credits”, the trainer can fill in “Percentage group credits”. This percentage is not the percentage of group clients with respect to the total number of clients, but the percentage of the total portfolio amount which belongs to group loans. So, if, for example, the percentage of group loans is 10%, the number of group clients has to be calculated such that 10% of the total amount of new loans comes from group clients. This calculation is quite complicated.

Role in Simfi In the simulation, when group loans are made available, the number of group clients has to be calculated

Where? Institution>Allow group credits Setup>Mainstream organization>Allow group credits

Formula number of group clients In the calculation of the number of group clients the following variables are used: Symbol NC(p) NCg(p) g Pg

Description Total number of clients in period p Total number of group clients in period p Number of members per group Percentage of group loans

The variable NC(p) is calculated. For more details see chapter 1: “Number of Clients”. The constants g and Pg are filled in by the trainer, see “Where?” on the left side of these information tables. The unknown NCg(p) depends on NC(p), g and Pg in a quite complicated way. For NCg(p) the following formula can be derived:

81


Verification formula For example, to NC(p), g and Pg, the following values can be assigned: NC(p) = 60000 g=3 Pg = 10% From these variables, NCg(p) can be calculated by the formula above:

To verify the formula, we can calculate the total amount of new group loans and individual loans when the average loan size is, for example, 700,00. From these total amounts we can show you that NCg(p) is calculated such that Pg = 10%. The total amount of group loans is:

The total amount of individual loans is:

The total amount of both group and individual loans is:

So Pg is:

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25: REGISTRATION OF LOANS & DEPOSITS General introduction In the decision input screen, the participant can fill out the average size and interest for certain loan or deposit products. In chapter 2, ‘Cutting the cake’, we explain how many clients are assigned to each participant. Each loan or deposit contract is registered in the MS Excel file. By means of this registration, the data in the balance sheet, P&L statement and menu item “Detailed portfolio” are determined.

Role in Simfi The loan and deposit contracts are registered individually to make the simulation more realistic.

Where? In the decision input screen

Registration of deposits Short time deposits are registered using tables of the following format: Contract number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 etc.

Quarter 0 Participant

Amount month 1

Amount month 2

Amount month 3

Quarter 1, 2, 3, etc. Participant, etc.

Table 21: Template to register short time deposits

The first column is the contract number. Each active client takes one contract each month. The number of rows allows for enough space to register each contract of each active client. The second, third, fourth, and fifth columns belong to quarter 0, which is the initialisation quarter. In the second column the participant number is filled out. This is the participant to whom the contract is assigned. The contracts of the first, second, and third months of quarter 0, are assigned to the participant filled out in the second column. The third, fourth, and fifth columns are the deposit amounts for months 1, 2, and 3 of quarter 0. For quarter 83


1 and the next quarters, the structure of the columns is the same. So there is one column to fill out for the participant and three columns for filling out the deposit amount for the first, At the beginning of each quarter (except quarter 0), the participant fills out the average deposit amount in the decision screen. This average deposit amount is not a monthly amount, but the average total of the whole quarter. In each month 1/3 of the quarterly amount is taken by an active client. Each monthly amount is varied by a random number, see chapter 23: ‘Variation loan size and deposit size’, for more details. The varied monthly amounts are registered in tables similar to Table 1. Each line corresponds to a contract number, where the columns “Amount month 1”, “Amount month 2”, and “Amount month 3”, within a certain line, are different contracts. For example contract number 1 in month 1 of quarter 0 is not the same as contract number 1 of month 2 of quarter 0. In the same way contract number 1 of month 1 of quarter 0 is not the same as contract number 1 of month 1 of quarter 1. second, and third month. Long time deposits and demand deposits are registered quarterly by means of the following template: Contract number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 etc.

Quarter 0 Participant

Amount

Quarter 1 Participant

Amount

Quarter 2, 3, etc. Participant

Amount

Table 22: Template to register long time deposits and demand deposits

The average deposit amount is also filled out in the decision input screen by the participant at the beginning of each quarter (except quarter 0). This is a quarterly amount. Each quarterly amount is varied by a random number, see chapter 23: ‘Variation loan size and deposit size’, for more details. The varied amounts are registered in tables similar to Table 2.

Registration of loans Short term loans are registered in a similar way as short time deposits. The columns in Table 1 are also used for short term loans. Contrary to deposits, there is a probability of default for loans. In the tables for loans, additional columns are added to register if, and when, a loan will default. In chapter 8: ‘Portfolio at Risk (PAR)’ we explain how, by means of random numbers, it will be determined if, and when, the default will take place. If a loan defaults, the remaining loan still outstanding will be put in a PAR category, see chapter 8: ‘Portfolio at Risk (PAR)’. With the additional columns, the template for short term loans looks like this: 84


Contract number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 etc.

Quarter 0 Participant

Month 1 Amount

Month default

Code

Month 2, 3, etc. Amount, etc.

Quarter 1, 2, 3, etc. Participant, etc.

Table 23: Template to register short term loans

As with short term deposits, at the beginning of each quarter (except quarter 0), the participant fills out the average loan amount in the decision screen. This average loan amount is not a monthly amount, but the average total of the whole quarter. In each month 1/3 of the quarterly amount is taken by an active client. Each monthly amount is varied by a random number, see chapter 23: “Variation loan size and deposit size” for more details. The varied monthly amounts are registered in tables whose template is in accordance with Table 3. When a loan belongs to a group client, the loan amount is first multiplied by the number of group members. After that, the loan amount is registered. In quarter 0 for month 1, two additional columns are added, being: “Month default” and “Code”. The same additional columns are added to the second and third month of quarter 0. For quarter 1 and the next quarters, the structure of the columns is the same as in quarter 0. The default takes place in the column “Month default”. The month of default is determined with respect to the maturity of the loan. So, if for example the default takes place at the end of the second month of the maturity, we’ll have to fill out ‘2’ in the column “Month default”. If no default takes place, 0 is filled out. In the column ‘code’, numbers are filled out consisting of two parts: The first part is the participant number, filled out in the column “Participant” and the second part the month of default is filled out in the column “Month default”. So, if a loan contract is assigned to participant 2 and no default takes place, we fill out ‘20’ in the column “Code”. The ‘code’ column is used in Excel formulas (SUMIF) to calculate the total defaulted amount in a certain period, for a certain participant. For long term loans, the loan amounts and moment of default are registered quarterly. The template has the following format: Contract number 1 2 3 4 5 6 7 8 9 10 11 12 13

Quarter 0 Participant

Amount

Quarter default

Code

Quarter 1, 2, 3, etc. Participant, etc.

85


14 15 etc.

Table 24: Template to register long term loans

Long term loans may also belong to group clients. So before registration, the loan amount is first multiplied by the number of group members.

Bundling of contracts In the simulation, each active client takes one contract for each loan or deposit product. In the MS Excel file weâ&#x20AC;&#x2122;ve created tables to register all the information for each contract. The number of active clients is 56,000 by default at the start of the simulation and may grow up to 100,000 or more during the remainder of the simulation. When we started developing SIMFI, we used one line for each active client in the MS Excel file. This, however, made the file size far too big. So, in order to solve this problem, we bundled the contracts in such a way that there are 500 bundles of contracts for each period. So, for each product we use 500 lines in the MS Excel file. In any quarter, the number of contracts per bundle is the number of active clients in that quarter divided by 500. In the old simulation for loan products we determined the month or quarter in which the default takes place for each loan contract individually. In the current version we determine the month or quarter of default per bundle of loans.

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26 INITIALISATION General introduction / Role in Simfi At the beginning of the simulation, all participants have identical balance sheets and P&L statements. The composition and total amount of the loan and deposit portfolios are also identical. To make this starting position possible, an initialisation is carried out before the real simulation is started.

Where? Setup> Decision input at T0 Setup>Default balance sheet at starting position Setup> P&L settings Institution> Default balance sheet at starting position Institution> P&L settings

Differences initialisation and real simulation During initialisation, the simulation will run 20 quarters. In the real simulation, the participant fills out his decisions under the menu item “Decisions”, but, during initialisation, all participants have the same decision input. This is filled out in the menu item “Setup”, under “Decision input at T0”. In chapter 25: “Registration of Loans and Deposits”, the data in the tables under “Quarter 0”, are used for all 20 quarters during initialisation. The instructor can download the MS Excel file in the ’Dashboard’ menu, under “Download model”. In this MS Excel file, all calculations and registrations of data are carried out. In some tabs, the initialisation period is indicated by quarter -19 , quarter -18, etc., till quarter 0. In other tabs you will only see quarter 0. In these tabs, the data are repeated 20 times. This way it isn’t necessary to make additional rows/columns for all 20 quarters of the initialisation period. During initialisation, the total amount of defaulted loans is not calculated using random numbers in each month or quarter, see chapter 8: “Portfolio at Risk (PAR)”. Instead, it is simply calculated by multiplying the PD (probability of default) by the total amount of loans at the beginning of the month/quarter. This way, the defaulted amounts are identical for all participants. Due to this simplification, it was not possible to take into account the effect of default in the calculation for interest on loans, see also chapter 4: “Interest Individual Loans Short Term (3 months)”. In the balance sheet, the loan loss reserve is fixed to 5% of the gross loan portfolio . There is no amortisation and inflation correction of net property and equipment, see chapter 12: “Depreciation & inflation” in the balance sheet. This way, it is easier to manipulate the IT-investments in the menu item ‘Setup’, under “Decision input at T0”, such that the net property and equipment have the desired value at the beginning of the simulation. The amortisation and inflation correction costs are still calculated and booked in the P&L statement. In quarter 0, these costs are calculated using the (uncorrected) value of net property and equipment from the previous quarter (so quarter -1). 87


The total equity is fixed to 1500000. The total equity minus profit/loss consists of 10% “Paid-up share capital”, 0% “Donated equity” and 90% “Reserves / retained earnings / accumulated losses””. These percentages can be modified by the instructor, in the “Setup” or “Institution” screen, under “Default balance sheet at starting position”. No dividend is paid over “Paid-up share capital”. In the P&L statement item “Exchange differences: gain/(loss)” is zero during initialisation, because from quarter -19 till 0 the parameter “Simulation currency against international reference currency” in “Market information” does not change.

88


27: COMPULSORY SAVINGS General introduction / Role in Simfi Compulsory savings are a special kind of deposits which become available at regulation level 2 or higher regulation levels, see also chapter 15 “Regulation”. Before a loan amount is assigned the client must pay to the bank an amount which is a fixed percentage of the loan amount. Such amounts are called compulsory savings from which the client receives interest. It can be withdrawn by the client when his loan has been paid back completely.

Where? Setup > Regulation> Additional regulation category requirements> Compulsory savings in type 2,3,4 (percentage of "Gross loan portfolio”) Institution> Additional regulation category requirements> Compulsory savings in type 2,3,4 (percentage of "Gross loan portfolio”) Decisions/Summary decision>Liabilities> Product design> Compulsory savings> Monthly interest rate Financial statement>Balance sheet/Projected balance> Liabilities> Current liabilities> Demand deposits Financial statement>Profit and loss (P&L)> Total financial expenses> Interest and fee expenses> For client deposits Detailed portfolio>Short term deposits> Demand deposits

Calculation interest The total amount of compulsory savings is calculated by:

In this formula the fixed percentage depends on the regulation level and can be found in the menu “Institution” or “Setup” within “Regulation”, see also chapter 15 “Regulation”. The gross loan portfolio can be found in the balance sheet. The interest is calculated by means of the average amount of compulsory savings which is:

The interest is calculated by:

The quarterly interest rate is calculated from the monthly interest rate which is filled out by the participant in the decision input screen. The quarterly interest rate is calculated by the formula: 89


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SimFi Trainer Manual