Loan Portfolio Audit for Microfinance - A Practical Toolkit

This best practices toolkit for microfinance explains how to conduct a loan portfolio audit.It states the objective of a loan portfolio audit:

• To enable stakeholders to understand the risks inherent in the microfinance institution's (MFI's) loan portfolio, and the systems and procedures used to mitigate this risk.

The paper lists the following questions that the portfolio audit tool attempts to answer:

• How do you conduct a loan portfolio audit?
• What are the key procedures to be performed?
• Is there a checklist of what to do?
• How do you:
  • Record audit keeping?
  • Review loan policies?
  • Determine the loan sample?
  • Document the review?
  • Learn about the MFI's system of internal control over lending activity?

The paper then:

• Outlines the following basic methodology for conducting a loan portfolio audit:
  • Tracing of individual loans from head office to borrower and vice versa;
  • Cross-verification with other accounting records;
  • Verification of loan administration and loan accounts;
  • Review of portfolio management and internal and external controls.

• Describes the checklist and tool.

The paper concludes by providing explanatory notes to technical aspects such as best practices:

• Format of the portfolio report and procedure for generating the report;
• Definitions and interpretations of key portfolio management indicators;
• Methods of aging of over due loans in an MFI's portfolio;
• Summary of key accounting processes;
• Transactions for loan portfolio management.