Introduction

When creating a Savings Products, the user can define how interest posting (or compounding) and calculation will happen.

Mifos out-of-the-box currently supports two types of interest calculation; Average Balance and Minimum Balance.

The user may also choose from two types of time period for interest calculation; Days and Months

For interest posting, only Months are supported.

Interest Posting

When a savings product is created, the user defines the frequency of interest posting of which only Monthly is supported in Mifos. Once at least one savings is open for a given savings product, a number of attributes of a savings product cannot be changed. The interest posting frequency and interest calculation frequency are two of this such attributes.

Interest posting always occurs on the end of the month and the exact dates are determined based on the start of the fiscal year (which is currently always Jan 1st in Mifos) and the chosen interest posting frequency.

For example every 3 months from Jan 1st would product interest posting dates of:
31st of March
30th of June
30th of September
31st of December

Interest posting is possible in Mifos from:

An Overnight batch job named SavingsIntPostingTask that detects savings accounts that are due for interest posting
When a Savings Account is closed and interest is due based on balance of savings account at closing.

Interest is only calculated and posted for the last valid interest posting period for a given savings account. As a result this means the following is also enforced:

No adjustments of deposits or withdrawals are allowed if the transaction exists in a previous interest posting period. To help enforce this we post interest even if the calculated interest is zero as this will result in the user being unable to adjust transactions prior to the interest posting.
No back-dated transactions are allowed if the transaction exists in a previous interest posting period

How Interest Is Calculated

When it becomes time to execute an interest posting for a given savings account we do the following:

Retreive all End Of Day Details for the account. (By this we mean that we find all deposits, withdrawals and interest that occured on a day)
Determine the range of applicable days for the interest posting period e.g. 1st of Jan to 31st of March
Determine the interest calculation periods that fall within this interest posting period. e.g. 1st of Jan to 31st of Jan, 1st of Feb to end of Feb etc
For each interest calculation period we determine the applicable interest calculation period details. This will contain information such as account balance at start of period, and all applicable End Of Day Details for period.
For each interest calculation period we also create an associated Interest Calculation Period Calculator which is solely responsible for calculating the interest earned/due for the given interest calculation period. The Savings Interest Details used by the calculator are taken directly from the savings product or if the savings products interest details have changed, its can use historical interest details. As a result, its is possible for adjust interest rates (or min interest required balance rule) and still calculate correctly the interest that was due in an interest calculation period that exists in the past.

Interest Calculation Formula

I = P(r) only if P is greater than or equal to minimum balance required for interest calculation otherwise the interest (I) will be zero.

r = R/100 x D/F

where,

P = AvB/D or MB/D

I = Interest Amount

AvB = Total Average Balance for duration D

MB = Minimum Balance for duration D

D = Duration/Interval (Days) for which the interest is being calculated

F = Number of Days in Financial Year

P = Principal amount (initial amount) (Average/Minimum Balance)

R = Annual rate of interest (as a decimal) (defined during savings product creation)

r = Effective interest rate for the duration D

A = amount of money accumulated including interest

Interest Calculation Examples

The purpose of these interest caluclation example is to describe by example how savings work in mifos. From reading through these, you should be able to understand

How and when dates for interest calucation and posting are determined
How the Average Balance algorithm works
How the Minimum Balance algorithm works
How and when interest is calculated for a given Interest Calculation Period
How and when interest is posted to a savings account

see Interest Calculation For Average Balance By Example
see Interest Calculation For Minimum Balance By Example

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