What is PEARLS?  PEARLS is a financial performance monitoring system designed to offer management guidance for credit unions and other savings institutions. PEARLS is also a supervisory tool for regulators. PEARLS can be used to compare and rank institutions; it can provide comparisons among peer institutions in one country or across countries. PEARLS is a set of financial ratios or indicators that help to standardize terminology between institutions. In total, there are 44 quantitative financial indicators that facilitate an integral analysis of the financial condition of any financial institution. The purpose for including a myriad of indicators is to illustrate how change in one ratio has ramifications for numerous other indicators. Each indicator has a prudential norm or associated goal. The target goal, or standard of excellence for each indicator is put forth by the World Council of Credit Unions, Inc. (WOCCU) based on its field experience working to strengthen and modernize credit unions and promote savings-based growth. Depositors can have confidence that savings institutions that meet the standards of excellence are safe and sound. PEARLS, primarily a management tool for institutions, can also be used as a supervisory tool by regulators. As a management tool, PEARLS signals problems to managers before the problems become detrimental. For boards of directors, PEARLS provides a tool to monitor management's progress toward financial goals. For regulators, PEARLS offers indicators and standards to supervise the performance of savings
institutions. Top Who Uses PEARLS? In partnership with credit unions, WOCCU created PEARLS in the late 1980s. WOCCU has refined and adjusted PEARLS over the past decade. WOCCU uses PEARLS with all credit unions participating in its technical assistance programs around the world. In addition to individual credit unions and credit union national federations and associations (including many WOCCU members), the Bolivian Superintendency of Banks uses PEARLS to supervise regulated credit unions in Bolivia. What Does PEARLS Monitor?  rotection The primary goal of evaluating the Protection indicators, as the heading implies, is to ensure that the financial institution provides depositors a safe place to save their money. Provisions for loan losses are the first line of defense against unexpected losses to the institution. Allowances for loan losses are essential, since delinquency signals that loans are at risk; thus, the institution must set aside earnings to cover those possible losses so that member-client savings remain protected. When financial intermediaries do not recognize loan losses: - Asset values are inflated;
- Reported net income is overstated;
- Provisions for loans losses are lacking;
- Member-client savings are not secure; and
- Dividends are overstated and erroneously paid out.
The most critical ratio under Protection is P1. The goal of P1 is to have 100% provisions for loan losses from loans that are greater than 12 months delinquent. Accurate measurement of delinquency (total outstanding balance of portfolio-at-risk at 30 days), indicator A1, is integrally linked to the creation of adequate allowances for loan losses.  The Protection section considers loan write-offs, on a quarterly basis, for loans delinquent greater than 12 months. The practice of writing-off loans is important because after a loan is delinquent for one year, it is unlikely the institution will receive repayment of that loan. The institution uses the provisions it has set aside of 100% of the value of that loan to write off the delinquent loan. As a result of the write-off, the balance sheet will state accurately the value of the institution's assets. To write-off a loan does not mean the institution stops seeking to collect payment on the loan; for this reason, protection indicators also consider amounts recovered from written-off loans. The last indicator under the Protection heading is Solvency. This indicator measures the relative worth of one dollar in member-client savings after adjusting for known and probable losses. The formula for calculating this ratio is: [(Total Assets Total Allowances)
- (100% of Loans Delinquent > 12 Months 35% of Loans Delinquent from 1-12 Months Total Liabilities Problem Assets - Deposits)] / Total Shares and Total Deposits.
Top  ffective Financial Structure The financial structure is the most important variable that affects growth, profitability and efficiency. Credit unions that maintain most (70-80%) of their total assets in the loan portfolio have the greatest opportunity to maximize returns on these productive assets while providing their member-clients with the credit services they seek. Similarly, institutions that fund their assets primarily (70-80%) with member-client deposits are independent from the fluctuating price of external funds. Financial structure is always changing and requires careful management, especially in cases of rapid growth. The Effective Financial Structure area of PEARLS focuses on an institution's sources of funds (savings, shares, external credit and institutional capital) and its uses of funds (loans, liquid investments, financial investments and non-earning assets). The PEARLS system provides information over time; therefore, managers, directors and regulators can observe the structural evolution of both the sources of funds and the uses of funds. An institution has an effective financial structure when assets, financed by savings deposits, generate sufficient income to pay market rates on savings, cover operating costs and maintain capital adequacy. Institutional capital, all legal reserves and surplus created either from the accumulation of net income or from capital donations, is the second line of defense to absorb unexpected losses. Institutional capital can be invested to expand products and services. It also can be used to pay for the high costs of technology and building construction. Net Institutional Capital, the ratio E9, is Reserves, Retained Earning and Provisions net of 100% of delinquent loans greater than 12 months and net of 35% of delinquent loans between 30-364 days overdue divided by Total Assets.
 Top What Do the BCS PEARLS Key Indicators Reveal? Bansalan Cooperative Society (BCS), a credit union on the island of Mindanao, has participated in the WOCCU Philippines program since 1998. BCS serves 100% rural member-clients. Member-clients grew from 1,308 in 1998 to 8,412 in mid-2002.
P1 & P2 - BCS lacked allowances for loan losses in 1998 when delinquency was 53%; thus, savings were at risk. Within a year, BCS made, and has maintained, complete loan loss provisions.
E1, E5, E6 & E9 - BCS has met the goal of placing 70-80% of its total assets in loans to its members (E1). While the ratio of savings deposits to total assets (E5) was less than 10% in 1998, by 2002, BCS had increased this ratio to 66%. BCS' business plan target is to raise E5 to 74% by January 2003.
- External credit of up to 24% decreased to below 1% of total assets (E6). Net institutional capital (E9), negative in 1998, increased to 14%, offering BCS the strength to confront unexpected losses.
A1 & A2 - More than half of the BCS loan portfolio (53%) was delinquent in 1998. By improving credit administration and collection, BCS lowered its portfolio-at-risk at 30 days (A1) to 7%.
- Unlike many Filipino credit unions that have substantial assets tied up in non-earning assets, BCS has lowered its ratio of non-earning assets to total assets to under 10% (A2).
R7, R9 & R12 - In 1998, BCS paid its members a dividend on their non-withdrawable shares (R7) that was below inflation and less than the rate of interest paid on voluntary savings deposits (R5). By December 2001, BCS paid real, above inflation, dividends on member shares.
- BCS has operating expenses (R9) higher than the standard of excellence maximum of 5%, but, since December 2001 it has managed to maintain this expense under 10%.
- BCS was drastically undercapitalized in 1998. Increases in net income (R12) have helped to build net institutional capital (E9) to above the standard of excellence of 10%.
L1 - BCS has not faced significant difficulties maintaining a minimum of 15% of its savings deposits in liquid instruments (L1) in order to meet member-client withdrawal demands.
S11 - In 1998, the total assets of BCS were barely keeping pace with inflation. From 1999 onwards, growth in total assets (S11) has been steady and above annualized inflation.
Top  sset Quality  Asset Quality is the main variable that affects institutional profitability. An excess of defaulted or delayed repayment of loans and high percentages of other non-earning assets have negative effects on credit union earnings because these assets are not earning income. As mentioned in the Protection discussion, it is essential that delinquency be measured correctly and minimized. Delinquency, commonly referred to as portfolio-at-risk, is the total outstanding balance of loans delinquent greater than 30 days. This ratio is a measurement of institutional weakness because if delinquency is high, then other key areas of credit union operations could be weak; e.g. loan loss provisions, institutional capital and net income.  In addition to controlling delinquency, institutions also must monitor the ratio of non-earning assets to total assets and ensure that these non-earning assets are not financed by savings deposits, external credit or member shares (in the case of a credit union or other user-owned financial cooperative). Sources of funds that have a financial cost such as savings deposits need to be invested in productive assets that will earn a return greater than the cost of funds. The only way to have non-earning assets, such as fixed assets, without negatively affecting earnings is to finance those assets with no-cost capital such as institutional capital or reserves. Top  ates of Return and Costs  The Rates of Return and Costs indicators monitor the return earned on each type of asset (use of funds) and the cost of each type of liability (source of funds). On the assets side, one can determine what types of assets earn the highest returns. On the liability side, one can determine what are the least and most expensive sources of funds. Yields and costs directly affect the growth rates of an institution. The intent is for an institution to: pay real rates of return on savings and shares, charge rates on loans that recover all costs and pay competitive salaries for employees. The goal of R1, Net Loan Income divided by the Average Net Loan Portfolio, is for loan prices to be set at Òentrepreneurial rates.Ó The entrepreneurial rate needs to cover the cost of funds, the cost of operations and administration, the cost of provisions and the cost of contributions to increase capital. The income ratios identify income from net loans, liquid assets, financial investments and non-financial investments. Financial cost ratios look at the costs of savings deposits, external credit and dividends on shares. Operating cost ratios (R9, R10) separate out operating costs and provisions for risk assets. 
Top  iqudity Managing liquidity is an essential component of administering a savings institution.  The goal of L1, 15% of short-term investments minus liquid assets minus short-term payables over total savings deposits, serves to maintain short-term investment liquidity to respond to member-client withdrawal and disbursement demands. The goal of indicator L3, to maintain the ratio of costly non-earning liquid assets to less than 1% of total assets, is to minimize non-earning cash to most daily opeational needs. Top  igns of Growth Signs of Growth reflect member-client satisfaction, appropriateness of product offerings and financial strength. Growth directly affects an institution's financial structure and requires close monitoring to maintain balance; for example, growth in savings (S5) drives growth in total assets (S11), but if loans (S1) are not growing as quickly as savings, then the institution will have high liquidity (L1) and low earnings (R12). Similarly, as savings are growing, it is important to watch that institutional capital (S8) is increasing at a similar pace so that there will be a buffer to protect those savings against unexpected losses. The growth indicators of PEARLS can help managers maintain a balanced and effective financial structure. Growth in Total Assets is a critical indicator since 16 of the other PEARLS performance indicators are linked to it. An institution needs to maintain accurate macroeconomic information, particularly the annualized inflation rate, in order to attain positive real growth. 
 How Do PEARLS & CAMEL Differ? There are three primary differences between the PEARLS and the CAMEL (Capital Adequacy, Asset Quality, Management, Earnings, Liquidity) monitoring systems:  - PEARLS uses strictly quantitative indicators while CAMEL uses quantitative and qualitative; (e.g., Management). PEARLS provides an objective evaluation of financial performance by reviewing the results of the strictly quantitative indicators.
- PEARLS evaluates the financial structure of the balance sheet. Financial structure has a direct effect on the efficiency and profitability of a financial institution since the more an institution maximizes productive assets, the more possibilities it has to generate earnings.
- PEARLS measures growth rates. Monitoring growth in different areas not only allows institutions to assess the degree of satisfaction among member-clients, but also assists managers to maintain an effective financial structure given that growth directly affects financial structure.
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