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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 and can provide comparisons among peer institutions in one country or across countries.

PEARLS is a set of financial ratios or indicators that help 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 World Council of Credit Unions based on its field experience with strengthening and modernizing credit unions and promoting 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.


Who uses PEARLS?

In partnership with credit unions, World Council created PEARLS in the late 1980s. World Council has refined and adjusted PEARLS over the past decades. World Council 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 World Council members), the Bolivian Superintendency of Banks uses PEARLS to supervise regulated credit unions in Bolivia.

What does PEARLS monitor?


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
  • 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 more 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 accurately state 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

P - Protection Goals (Excellence)
1. Loan Losses Allowances / Delinq. >12 Mo. 100%
2. Net Loan Loss Allowances / World Council Allowance Required for Delinq. 1-12 Mo. 35%
3. Complete Loan Charge-off of Delinq. > 12 Mo. Yes
4. Annual Loan Charge-offs / Average Loan Portfolio Minimized
5. Accum. Charge-offs Recovered / Accum. Charge-offs > 75%
6. Solvency (Net Value of Assets/Total Shares & Deposits) ≥ 111%


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, 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.

E - Effective Financial Structure
Goals (Excellence)
1. Net Loans / Total Assets 70-80%
2. Liquid Investments / Total Assets ≤ 16%
3. Financial Investments / Total Assets ≤ 2%
4. Non-financial Investments / Total Assets 0%
5. Savings Deposits / Total Assets 70-80%
6. External Credit / Total Assets 0-5%
7. Member Share Capital / Total Assets ≤ 20%
8. Institutional Capital / Total Assets ≥ 10%
9. Net Institutional Capital / Total Assets ≥ 10%


 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.

A - Asset Quality
Goals (Excellence)
1. Total Loan Delinquency / Gross Loan Portfolio ≤ 5%
2. Non-earning Assets / Total Assets ≤ 5%
3. Net Zero Cost Funds / Non-earning Assets ≥ 200%


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.

R - Rates of Return and Costs
Goals (Excellence)
1. Net Loan Income / Average Net Loan Portfolio Entrepreneurial Rate
2. Liquid Inv. Income / Avg. Liquid Investments Market Rates
3. Fin. Investment Income / Avg. Fin. Investments Market Rates
4. Non-fin. Inv. Income / Avg. Non-fin. Investments ≥ R1
5. Fin. Costs: Savings Deposits / Avg. Savings Deposits Market Rates > Inflation
6. Fin. Costs: External Credit / Avg. External Credit Market Rates
7. Fin. Costs: Member Shares / Avg. Member Shares Market Rates, > R5
8. Gross Margin / Average Assets ˆE9=10%
9. Operating Expenses / Average Assets ≤ 5%
10. Provisions for Risk Assets / Average Assets ˆP1=100%, ˆP2=35%
11. Other Income or Expense / Average Assets Minimized
12. Net Income / Average Assets (ROA)



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.

L - Liquidity
Goals (Excellence)
1. Liquid Assets - ST Payables / Total Deposits 15-20%
2. Liquidity Reserves / Total Savings Deposits 10%
3. Non-earning Liquid Assets / Total Assets < 1%


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.

S - Signs of Growth (Annualized Rates)
Goals (Excellence)
1. Net Loans ˆE1=70-80%
2. Liquid Investments ˆE2 ≤ 16%
3. Financial Investments ˆE3 ≤ 2%
4. Non-financial Investments ˆE4=0%
5. Savings Deposits ˆE5=70-80%
6. External Credit ˆE6=0-5%
7. Member Shares ˆE7 ≤ 20%
8. Institutional Capital ˆE8 ≥ 10%
9. Net Institutional Capital ˆE9 ≥ 10%
10. Membership ≥ 15%
11. Total Assets > Inflation + 10%

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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