Microfinance institutions normally incur three types of costs while delivering financial services, viz. operating costs, risk costs, and cost of funds. Thus informs ‘Technical Guide on Accounting for Microfinance Institutions’ (www.icai.org). Operating costs are incurred by the MFIs (microfinance institutions) in delivering credit to the clients including visits to the clients, completing paperwork, disbursing loans, and collecting repayments, the publication explains. These costs include ‘the cost of minimizing risk through monitoring and follow-up of disbursed loans, exercising internal control, and undertaking an external audit of the MFIs.’
Risk costs, which are the provisioning expenses to meet possible losses, represent non-cash operating expenses and are the cost of portfolio losses. And the third type, the cost of funds, is the cost incurred in borrowing or raising funds for on-lending to microfinance clients.
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