At the centre of every institution are finance and accounting functions. As the ‘receivers and payers’ in every institution, the finance and accounting cannot be overlooked even into the foreseeable future where people are advocating machines, robots and the rest. Finance and accounting roles can never depart from any institution, it shall only revolve, evolve and adapt to the changing needs of the time. As one of the oldest administrative and back-office roles, this function can be described in the microfinance and banking sectors as the planners, executors of the plans and back-stoppers in relation to risk management.

In general, the accounting function could perform the following tasks: –

  1. Accountants understand and manage the finances of all kinds of institution, and are employed in many roles.
  2. Financial planners help individuals and families to set and achieve personal financial goals throughout life. They help institutions to match their finances to their institutional goals and issues.
  3. Investment managers manage individuals’ and institutions’ assets and credit and deal with pensions (the money you save while you are working to use when you retire).
  4. Regulators support the work of accountants and financiers and make sure both the professionals and the professional bodies that regulate them are doing their jobs properly and protecting consumers.
  5. Taxation and payroll professionals help people calculate their tax and pay their employees.
  6. Treasury professionals manage the money and financial risks in a business. They also develop the long-term financial strategy and policies that will add value and drive business success.

The following could be listed as the major specific functions of the finance and accounting function in the MFI: –

  1. Select the appropriate mix of financial instruments (debt and equity) for the continuous functioning of the MFI
  2. Prepare accurate and timely financial reports.
  3. Keep and maintain financial records – custodians of all income, expenditure, liabilities and fixed assets.
  4. Prepare, control annual budget for all departments and units.
  5. Manage cash and treasury of the MFI
  6. Analyse current and past financial performance
  7. Manages Accounts Payable and Accounts Receivable efficiently in order to avoid short-term cash flow (Working capital) challenges.
  8. Manage payroll in conjunction with the Human Resources.

The financial reporting of MFIs revolves around a number of key accounting variables as defined by the regulators of the specific countries. Nonetheless, since the advent of the International Financial Reporting Standards (IFRS), these standards have harmonised all accounting practices across national boundaries. The following could be seen as the key elements of financial reports for the microfinance sector: –


Interest income

Interest earned on loans, securities and investments and on deposits placed with banks. The gross amount is included in this category. Interest income here must be accrued according to IAS 39 — Financial Instruments: Recognition and Measurement as amended by IFRS 9 – Financial Instruments. Many MFIs have been keeping their interest income on ‘cash basis’ instead of the ‘accrual basis’. On two instances, one in Africa and another in Asia, I have had the cause to change this process for two institutions, getting their external auditors involved. It was somehow a fight with the external auditors on these two occasions as they wanted to maintain the status quo. But eventually, the MFIs saw a change in their profitability position as a result of this change.

Interest expense

Interest paid on customers’ deposits and borrowings from other financial and non-financial institutions.

Net interest margin

This is the difference between income and interest expense. The net interest margin ratio is calculated by dividing net interest margin by interest income.

Non-interest income

All other income not derived from lending activities other than foreign exchange. Such as fees, commission and other regular charges from the MFIs ordinary business.

Foreign exchange gain / (loss)

The difference between the market value of the foreign currency equivalent and the book value.

Other income

Amounts not stated in either interest or non-interest income and are not ordinarily derived from MFI’s business such as profits from the disposal of fixed assets or insurance compensation.

Operation expenses [Opex]

Opex is the general cost of operations that involved S [Staff] – Payroll costs, A [Administration] – inclusive but not limited to rentals, fuel, maintenance, stationery, etc., G [General overhead] and depreciation expenses.

Loan write-offs and provisions

Loan write-offs are those loans which become uncollectible or for which a 100% provision has been made. These uncollectible loans are credited against the provision accounts. Loan provision is expenses that are charged to the P&L and credited to a Balance Sheet account as loan loss reserve [LLR].

Grants income

When an MFI receives a cash grant from an NGO to be used for an overhead subsidy or other purposes during the year, this account is used.

Net profit

This is the net result for the period and the year-to-date result after the expenses. Overheads and provisions for losses are deducted from total income.



Cash balance with Regulatory Bodies and Banks

This is cash in vault and cash with cashiers and balance with the Regulatory body (the Central/Reserve Banks) and other banks.

Marketable securities & short-term investments

Includes treasury bills and negotiable instruments and other short-term trade securities.

Loans to customers

This is the gross loan amounts given out to customers. It includes both performing and non-performing loans. It is the largest asset item in any MFIs’ balance sheet.

Prepayments and receivables

Payments which have been made to suppliers. The benefit of which cover more than one accounting period, are prepaid expenses. These prepayments are amortized over the tenor of the contractual periods. Receivables are recognized when amounts will be received in cash within the current year.

Long-term investments

This consists of equity investments, long-term government bonds or debt securities, where the intention is to hold them to maturity and not for trading purposes. Take note that the mention of equity here refers to investment in other institutions and not referring to the company’s share capital under discussion. Refer to Equity portion below for further explanation.

Plant, Property & Equipment [PPE]

Land, buildings, equipment, motor vehicles, leasehold improvements are included.

Other assets

Includes interest receivable accounts and all other accounts no classifiable in the above.


Customer’s deposits

Include only deposits from customers and non-bank customers, both voluntary and compulsory.

Deposits from banks and financial institutions

Include deposits from banks and financial institutions.

Accounts payable

These are amounts which are not yet paid for goods or services received and used and payable within the current year.

Accrued expense and provisions

Included expense incurred but not paid such as accrual for taxes or audit fees and loss provisions.


This account records borrowing from local and overseas banks, corporations and financial institutions. This represents both local and foreign currency borrowings converted at the transaction date. When there is an exchange position, an exchange gain/loss arises when the rate of exchange changes. The gain/loss in an exchange must be included in the profit & loss account.

Deferred Revenue

When revenue is received in cash that relates to future accounting periods, such as a grant received that will cover a number of years of operating expense of the MFI, the amount received must be deferred and amortized over the same period.

Suspense, clearing and inter-branch accounts

When an MFI has several branches within the same country and other jurisdictions, the transactions between the head office and the branches are recorded in “inter-branch accounts” these inter-branch accounts are eliminated when the main MFI reports its financial statements.

Other liabilities

Include interest payables and all other liabilities not included in the above.


Paid-up capital

This records the actual cash paid in as original capital and subsequent capitalization

Premium on share capital

This is the difference between the par value of the shares and the issue price of the share.

Donated capital/equity

This account records all capital donated in cash or kind.

Hybrid capital instruments

This refers to convertible bond issues when there is an option to convert the debt portion of the instrument to equity at an exercise price and within a certain period.


This includes both revenue and capital reserves. Revenue reserves are derived from earnings and capital reserves from revaluations of assets.

Retained earnings

This includes previous years’ accumulated profit & Loss not paid out as dividends but retained in the MFI.

Net income

This the net profit & Loss after providing for loan losses and taxation for the current period.


Most MFIs prepare their budget using the bottom-up approach. With this, the branches prepare their budgets, submit by the Branch Managers, through the Chief Operating Officer and this is consolidated at the head office with other cost centre budgets. Cost centres also use the similar approach of obtaining cost information from various team members which are later consolidated with the head of the centre. Others also use the top-down approach whereby the budgets are planned from the head office and administered to the branches and various units/departments.

The best approach to engaging the workforce and motivating them is to use the bottom-up approach. This ensures consensus and build the confidence of all unit heads and make them more responsible for their budgets.

The Chief Financial Officer (CFO) or whatever the title may be in the organization, is usually the chairman of the Budget Committee. The Budget Committee is usually composed of all Cost Centre, Profit Centre and Investment Centre heads. The CFO must consolidate and submit the draft budget for the Committee to discuss and recommend for approval. The draft Budget is then approved by the Senior Management Team or the Board depending on the structure of the MFI concerned.

The following are various definitions and processes related to the budgeting process of the MFI: –

What is a Budget?

A budget is a financial plan for a defined period of time.

It may also include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.

It expresses strategic plans of business units and an organization, activities or events in measurable terms.

Capital and Revenue Budgets

Capital budget consists of fixed assets. These are called non-current items or Capex (capital expenditure). Items purchased here enter into the Balance Sheet with depreciation hitting the Profit and Loss Account as costs are amortised over their useful lives.

Revenue Budget consists of recurrent income and expenditure items like interest income, operational expenses, fees and charges of the company. They are recurrent because these items appear regularly in the day to day running of the business. These are the Profit and Loss items.

A Profit Centre

A profit centre is a branch or division of a company that is accounted for on a standalone basis for the purposes of profit calculation.

A profit centre is responsible for generating its own results and earnings, and as such, its managers generally have decision-making authority related to product pricing and operating expenses.

Profit centres are crucial in determining which units are the most and least profitable within an organization.

In the MFI sector, the whole of Operations Department is a Profit Centre, though this may be limited to only the branches.

A Cost Centre

A cost centre is a department within an organization that does not directly add to profit but still costs the organization money to operate.

Cost centres only contribute to a company’s profitability indirectly, unlike a profit centre, which contributes to profitability directly through its actions.

Managers of cost centres: Human Resources, Administration, ICT, Internal Audit, Accounting & Tax, Public Relations are responsible for keeping their costs in line or below budget.

An Investment Centre

A business unit that can utilize capital (investment) to directly contribute to a company’s profitability.

Companies evaluate the performance of an investment centre according to the revenues it brings in through investments in capital assets compared to the overall expenses.

Capital assets here means investments in banks, other businesses and properties that generate rental income

In many MFIs, the Fundraising unit of the finance department or the Treasury Department are in charge of investments. They are regarded as the investment centre.

Methods of Budgets

Various budgeting methods have been written below for your guidance.

Standard Budget

A Standard Budget is a vehicle for a variance. It is commonly derived from estimates on future costs that have Fixed and Variable cost components.

Standard budgets present information at only one level of activity and do not provide information on how the variable portion of the costs would affect the budget

This is commonly used in the manufacturing or process costing sectors.

Zero Based Budget (ZBB)

ZBB is a method of budgeting in which all expenses must be justified for each new period.

Zero-based budgeting starts from a “zero base,” and every function within an organization is analysed for its needs and costs.

This is commonly used in setting up a new branch, a new unit or introducing a new product.

Incremental Budget

An incremental budget is a budget prepared using a previous period’s budget or actual performance as a basis with incremental amounts added for the new budget period.

The allocation of resources is based upon allocations from the previous period.

This is widely used when performance is a continuing activity and units and prices could fairly be adjusted for the current/expected level of activity.

Activity Based Budget (ABB)

Activity-based budgeting is a method of budgeting in which the activities that incur costs in every functional area of an organization are recorded and their relationships are defined and analysed.

Activity-based budgets do not simply adjust prior budgets to account for inflation or business development. Instead, activity-based budgets search for efficiencies in business operations and develop budgets based on these activities.

The activity-based budgeting process can be simplified into a three-step process. First, relevant activities are identified. These cost drivers are the items responsible for incurring revenue or expenses. Second, the number of units related to each activity is determined as the baseline for the calculation. Finally, the cost per unit of activity is determined and multiplied against the activity level.


We have a lot to talk about the accounting and finance function. We introduced the topic on the sources of funding for MFIs, we talked about setting internal control procedures in order to control omissions, commissions and frauds. Through funding proposals and business plans which are normally done by this functional area, we get funds raised. Internal controls are designed by this function as well. At the centre, the heart of every organisation is finance – the money and how to control it. At the left-hand side – the execution side – is the operations function. At the right-hand side – is the administration and human resources function. At the centre is the finance and accounting function.



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