# **Accompanying Notes to Table 5**

# A. Range of Observed Values of financial risk indicators:

For Category A MFIs the indicators used are those for Fundacion Integral Campesina (FINCA) in Costa Rica, La Asociacion Dominicana para el Desarrollo de la Mujer (ADOPEM) and Asociacion para el Desarrollo de Microempresa Inc. (ADEMI) in the Dominican Republic, Kenya Rural Enterprise Programme (K-REP) in Kenya, and Alexandra Business Association (ABA) in Egypt as reported in Christen et al. (1995), supplemented by data from Benjamin and Ledgerwood (1998, draft), and The Microbanking Bulletin, v. no. 1 (1997) and no. 2 (1998).

For Category B MFIs the indicators used are those for Union Popular Credit Union (Tiquisate), UPA Credit Union (Amatitlan) and 20 core credit union members in the National Credit Union Federation (FENACOAC) in Guatemala, as reported in Almeyda and Branch (1997, draft). For Category C MFIs the indicators used are those for the Lembagan Perkreditan Desa (LPD) community-owned village banks and the Bank Rakyat Unit Desas in Indonesia, and Banco Solidario S.A. (BancoSol) in Bolivia, as reported in Christen et al. (1995).

- B. Suggested values of financial risk indicator thresholds for internal governance and external supervision (Columns 6 and 7, Category B) for credit unions and savings and credit cooperative societies (Category B) are taken from Richardson (WOCCU, 1997).

- C. Suggested threshold values of financial risk indicators for external regulation (Column 4, Category A) apply only to NGO MFIs availing of an exemption provision for limited deposit-taking under the banking law and/or receiving authorization for mobilizing wholesale deposits through commercial paper issues, large-value certificates of deposit or investment certificates from the bank supervisory authority.

- D. Suggested threshold values of financial risk indicators for external regulation (Column 10, Category C) apply primarily to MFIs obtaining authorization and license from the bank regulatory authority to operate as specialized banks or financial institutions. The limitation may pertain to geographica **l** imits on operations (county-wide or regional, but not nationwide), exclusion of trust and foreign exchange/foreign trade-related services, and/or exclusion from provision of demand deposit services.

While the Basle Agreement permits a gearing ratio value of 8:1 for risk-weighted assets to capital, this paper supports a lower limit equivalent to 80% of the Basle ratio for MFI banks because of the nature of risks in microfinance and access to capital of organizers, promoters and shareholders of licensedbank MFIs. In lieu of a risk assets : capital ratio some countries use a ceiling on the ratio of liabilities to capital. Setting a limit on funding liabilities at 8- times capital results in a 6.5:1 approximate ratio of risk assets : capital, assuming that the value of loans outstanding does not exceed 80% of average total assets. The interrelationship among the variables in the balance sheet supports the position put forward in this paper that MFIs would be well served to observe more stringent and lower gearing ratios than those permitted in the Basle or national standards.

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