Return on equity (ROE)

What is it?

The MFI’s management information system produces, on a monthly basis, the MFI’s return on equity (ROE) for the last 12 months on a rolling basis, and the ROE is monitored by means of a written report by management and the Board of Directors. The monitoring report highlights the MFI’s actual performance (ROE) in relation to targets and limits.

Why is it important?

Monitoring return on equity (ROE) is an important management tool to track the MFI’s actual performance in meeting its financial sustainability targets. It also helps management and the Board in being proactive in decision making, in particular in relation to underperformance in relation to targets. It is important that the MFI’s ROE and other profitability indicators be shared and discussed with the management team to ensure a climate of transparency and also to ensure alignment in meeting the MFI’s business objectives.

Key things to watch out for

  • Does the MFI’s monitoring of its return on equity include the comparable ratio for the same period last year?
  • Is the ratio calculated in a consistent fashion?
  • Does the monitoring report include explanatory comments for variances and/or items of note?
  • What actions are taken?
  • Is the monitoring reported in a user-friendly form?

How to calculate

Return on equity is defined as net income (after taxes and excluding any grants or donations) by average equity for the given period.

Benchmarking

www.mixmarket.org/.

Resources

  • GTZ: A Risk Management Framework for Microfinance Institutions. Available at www.ruralfinance.org.
  • Measuring Results of Microfinance Institutions: Minimum Indicators that Donors and Investors Should Track, by Richard Rosenberg. Available at www.cgap.org.
  • Measuring Performance of Microfinance Institutions: A Framework for Reporting, Analysis, and Monitoring by SEEP Network and Alternative Credit Technologies LLC. Available at www.seepnetwork.org/.
  • MicroRate Technical Guide: Performance and Social Indicators for Microfinance Institutions. Available at www.microrate.com.

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