One of the systems used in analysis of financial institutions is CAMEL(CAMELS) which consider such factors as: Capital Adequacy, Asset Quality, Management, Earnings and Liquidity.

The following information may be necessary for CAMEL analysis:
- financial statements
- budgets and cash flow projections
- portfolio ageing schedules
- funding sources
- information about the board of directors
- operations and staffing
- macroeconomic information

CAPITAL ADEQUACY

- Dependency Ratio
Formula: Donations and grants/Total performing assets
Purpose: Shows dependency of institution on outside funding for operations.
Definition: Average performing assets - beginning balance and ending balance are averaged for the period (including loans, investment and advances). Performing assets currently pay interest or are not more than 60 days past due.

- Capital to Assets Ratio (Capital Adequacy Ratio)
Formula: Capital/Total performing assets
Purpose: Shows overall capital sufficiency
Definition: Capital - networth (Assets-Liabilities). Includes equity or equity equivalent instruments including retained earnings and subordinated debt. Does not include donations and grants
Recommended level: 8%+, 12%+ mentioned in different sources.

- Debt to Asset Ratio
Formula: Total liabilities/Total performing assets
Purpose: Indicates provisioning requirements on loan portfolio for current period.
Definition: Loan loss provision - allocation in current period to the loan loss reserve.

ASSET QUALITY

- Loan Loss Provision Ratio
Formula: Loan loss provision/average performing assets
Purpose: Indicates provisioning requirements on loan portfolio for current period
Definition: Loan Loss Provision - Allocation in current period to the loan loss reserve.

- Portfolio in Arrears
Formula: Balance of loans in arrears/value of loans outstanding
Purpose: Measures amount of default in portfolio
Definition: Arrears - past due; typically calculated in the basis of the loan advance.

- Loan Loss Ratio
Formula: Amount written off/Average loans outstanding
Purpose: Indicates extent of uncollectible loans over the last period. Any loan more than on year past due will be automatically considered uncollectible.
Definition: Amount written off - a loss recognized on a loan in a period.

- Reserve Ratio
Formula: Loan loss reserve/Value of loans outstanding
Purpose: Indicates adequacy of reserves in relation to portfolio.
Definition: Loan loss reserve - reserve maintained to cover potential loan losses.

- Loan Concentration Tables
Definition: Concentration of loans by Industry, Region, Borrower, Portfolio Quality

- Related Party Policies and Exposure
Components: Loans outstanding to related parties, Current approval process for these loans, Checks and balances for such loans.

MANAGEMENT

- Number of Active Borrowers per Credit Officer
Formula: # of active borrowers/# of loan officers
Purpose:Indicated performance of loan officer and efficiency of methodology

- Number of Active Borrowers per Management Staff
Formula: # of active borrowers/# of management personnel (excluding loan officers)
Purpose:Indicates performance of manager and efficiency of methodology.

- Portfolio per Credit Officer
Formula: Value of loans outstanding/# of loan officers.
Purpose: Indicates potential financial productivity of loan officer.

- Cost per Unit of Money Lent
Formula: Operating costs/total amount disbursed
Purpose: Indicates efficiency in distributing loans (in monetary terms).

- Cost per Loan Made
Formula: Operating costs/# of loans made
Purpose: Indicates efficiency in disbursing loans.

- Quality of governance

- Quality of information technology system

EARNINGS

- Return on Performing Assets
Formula: Financial income/average performing assets
Purpose: Indicates financial productivity of credit services and investments activities.
Definition: Financial income - revenues from assets such as loans, investments and securities less borrowing expense. Generally includes fee income and generally excludes extraordinary items.

- Return on Average total assets
Formula: Financial income/average total assets
Purpose:Parallels the Return on Performing Assets, yet includes non performing assets.

- Financial Cost Ratio
Formula: Financial costs/average performing assets
Purpose: Shows costs of funds: affected by mix of net worth, soft loans and hard loans.
Definition: Financial costs (interest expense) - cost generated from liabilities such as deposits, debt outstanding, capital costs and other short term liabilities.

- Administrative Cost Ratio
Formula: Administrative expenses/Average performing assets
Purpose: Key indicator of efficiency of lending operations
Definition: Administrative expenses - costs associated with managing the institution such as salaries, rent and also depreciation.

- Operating Self-Sufficiency Ratio
Formula: Financial Income/Financial and administrative expenses + Provisions
Purpose: Shows ability of institution to cover costs of operations which includes financial and non-financial expenses with internally generated income.
Definition: Provisions - periodic loan loss allocations to the reserve account.

- Financial Self-Sufficiency Ratio
Formula: Financial income/financial and administrative expenses + provisions + (Imputed cost of capital including grants and donations).
Purpose: Shows ability of institution to be fully sustainable in the long-run by covering all operating costs and maintaining value of capital.
Definition: Imputed cost of capital - estimated return required for capital in the specific market.

- Interest-Spread Ratio
Forumula: [ Income from Loan Portfolio / Average Loan Portfolio ] - [ Interest Expenses and Other Financial Charges / Average Borrowings ]

- Earnings-Spread Ratio
[ Total Income - Non-Operating Income / Average Total Portfolio ] - [ Interest Expenses and Other Financial Charges / Average Total Resources ]

- Intermediation Cost Ratio
Formula: [Total Expenses - (Interest expenses + fees and commissions and commitment charges)] / Average Total Assets

LIQUIDITY

- Current Ratio
Formula: Projected cash inflow/projected cash outflow
Purpose: Shows ability of institution to meet projected near term obligations.

- Analysis of liability structure,

- Analysis/forecast of cash flow

- Loan to Deposit Ratio:
Formula: Loans (excluding short-term loans and marketable securities) / Customer Deposits

- Loan to Deposit Ratio (Medium and Long-term)
Formula: Long and Medium-term Loans / Long and Medium-term Deposits

MicroRate

MicroRate analysis and rating system has the following methodology:

1. Financial Profile
Capitalization
Profitability
Liquidity Risk
Market Risk
- Asset-Liability Management
- Interest Rate Risk
- Foreign Exchange Risk

2.Operational Performance
Quality of Loan Officers
Agency / Branch System
Management Information System

3. Portfolio Quality

4. Management and Organization
People and Experience
Operating Efficiency
Risk Management
Future

5. Governance and Strategic Positioning
Board and Owners
Market Strategy
Risk Identification

RISK FACTORS FOR FINANCIAL INSTITUTIONS

The main concern for financial institutions is risk management. The major risks to be examined include:

- Market Risk and Value-at-Risk (VaR)
- Foreign Exchange Risk
- Contagion Risk

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