Five Measures of Financial Sustainability

1. The value of project cash flow. Positive net present value of flows to and from the loan portfolio of the program. Von Pischke offers 3 ways to measure this:

• Measure the value of the loan portfolio. Measure the cash flowing into the program versus loans. Distinguish between contractual flows into the portfolio and actual flows. Analyze the performance of loans in each time period, rather than overall performance. A negative value (or, an operating loss) means the program is not self-sustaining in the present loan period and may be unprofitable in the next.
• Measure direct noninterest costs and revenues of credit operations. Measure whether surplus (i.e., profits from loans made by the program or unspent funds) covers the net costs of operating the program. This means separating "core" operating costs (such as processing applications) from other costs. Sustainable programs use internally generated income to cover all their core costs.
• Measure the indirect costs of credit operations. Measure whether operating surpluses contribute to other overheads such as buildings and staff.

2. Accounting profit/loss. Does the loan portfolio generate a profit or a loss? Use income statements to calculate all the returns or loans repaid to a program for a given time period.

3. Independence from subsidy. Does the program require handouts to survive? Measure the degree to which microcredit programs are dependent on subsidies, such as artificially low interest rates. Von Pischke recommends using the "Subsidy Dependence Index (SDI)" developed by World Bank.

The SDI tells lenders (such as banks) how dependent particular programs are on special loans. The SDI measure indicates the percentage increase in a lender's interest rate that would be required for the lender to break even if the subsidy (or a reduced or concessionary interest rate) were removed from a particular microcredit program.

4. Source of Funding. Does a lender create sufficient confidence among clients to mobilize their savings? Measure the share of the total loan portfolio contributed by various sources. The more a microcredit program depends on funds from the community itself, rather than external agencies, the more successful it will be. More diversified sources, combining lending and savings, lead to responsible behavior by program managers and are more sustainable.

5. Lender "constancy." Does the lender balance outreach and financial sustainability? Measure whether loan services are comprehensive, easily available, and inexpensive (in terms of the cost of the loan and costs of application). Too much attention to financial criteria can undermine the goal of outreach for the benefits of profitability and sustainability.

Von Pischke calls for greater efforts in systematic data collection and the disclosure of all relevant financial information by microcredit programs. In doing so, financial institutions supporting these programs can evaluate their performance and assess the risks involved in operating particular programs.