Financial ratios are significance tool for MFIs and are calculated from portfolio reports generated by different institutions. The essence is to determine the health of the portfolio. The ratio analysis evaluates major aspect of the MFI financial and operating performance in other to make concrete decision based on generated ratio report.
The simplest definition for ratio is that “Ratios are relationship between numbers”, calculated by dividing a numerator by the corresponding denominator with the result being express as a percentage, duration, monetary value, or comparison between figures.
Importance of Ratios
- Ratios are used for benchmarking purposes.
- They are used to measure performance of an MFB.
- They are used to compare results with other MFBs performance.
- It helps understand where specific numbers are coming from and from which financial report.
- It monitors trends and help understand why figures are increasing or decreasing.
- It gives us direction on what changes need to be made on certain financial decisions.
- It helps enhance advocacy for monitoring microfinance activities.