Microfinance Ratings: What use are they to investors?


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Microfinance Institutional Rating

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Microfinance Ratings: What use are they to investors?

  1. 1. Microfinance Ratings: What use are they to investors? Microfinance Institutional Ratings
  2. 2. Ratings, assessments and certification 1 Characteristics Rating Assessment Certification Main purpose Compare performance with other actors / decide on investment allocation Understand weaknesses and improve performance Recognize compliance with standards Reference Industry benchmarks and best practices Best practices Recognized standards Communication Grade communicated to the market in all cases Internally or to selected third parties Certification is public Focus of the on-site mission Systematic review of main risks; cross- verification of opinion Interactivity, experience sharing Detailed check-list; verification; detailed documentation
  3. 3. Microfinance Institutional Rating • A Microfinance Institutional Rating provides an opinion on the long- term institutional viability and creditworthiness. • It measures the probability that an MFI will continue to operate and remain a “going concern”, even if an external shock strikes. • It can be used by regulated or un-regulated Microfinance Institutions 2
  4. 4. Microfinance Institutional Rating • This opinion is provided after a comprehensive assessment of risks and performance on the following categories. 3 Microfinance Institutional Rating Governance & Management Operations Financial profile Responsible practices Microfinance environment
  5. 5. Microfinance Institutional Rating • Some risks are currently evaluated in the Social Ratings (reputation risk, credit risk derived from irresponsible lending practices with clients) • Microfinance Institutional Rating methodologies have evolved to formally include risk relevant “social” indicators • Governance & Management • Responsible decision making • Mission Alignment • Responsible practices • Client protection principles • Responsible performance 4
  6. 6. 5 Governance & Management Corporate governance Strategy Management Responsible decision making Mission alignment
  7. 7. 6 Financial profile Financial performance Funding ALM Solvency
  8. 8. 7 Operations & Organization Loan portfolio quality Human resources MIS Internal Control and Audit
  9. 9. 8 Responsible practices Client protection Responsible performance
  10. 10. 9 Microfinance environment Political, economic and financial environment Legal & Regulatory environment Competitive environment
  11. 11. MIR and social ratings 10 Microfinance Institutional Rating Social Rating  Client Protection (internal & external)  Alignment of governance & decision-making with stated goals Social outcomes  Outreach to the poor  Appropriateness of services for the needs of the poor and excluded  Social responsibility to the community  Social responsibility to the environment  Social change (women empowerment, education, etc.)  Universal Standards of Social Performance Management > Long term viability > Capacity to achieve social goals
  12. 12. MIR and Client Protection Certification 11 Microfinance Institutional Rating Client Protection Certification Assurance that best practices in terms of client protection are implemented (focus on the client) Client protection practices that create a risk for the MFI (focus on the institution)
  13. 13. Rating Grade comparability table 12 Category Classification Definition M-CRIL MFR MR PR 1 Excellent Excellent performance Low or well-managed short- medium term risk α+ α AAA AA A α+ α A++ A+ A A- 2 Good Good performance Modest or well- managed short- medium term risk α- ᵝ+ BBB BB α- ᵝ+ B++ B+ B B- 3 Fair Fair performance Moderate to medium-high risk ᵝ ᵝ- B CCC ᵝ ᵝ- C++ C+ C C- 4 Weak Weak or poor performance High to very-high risk ᵝ+ ᵝ CC C D ᵝ+ ᵝ D E
  14. 14. MIR and credit rating 13 Strong weight on external factors that have an influence on the risk of default and severity of potential losses  Sovereign risk  Transfer and Convertibility risk  Operational environment (infrastructure, legal system) > Long term viability > Risk of default Microfinance Institutional Rating Credit Rating Common elements Deep field assessment, adapted to the risk pattern of MFIs:  Governance & Management  Operational risks  Microfinance operations  Responsible Practice Analysis of  Financial performance  Funding  Asset and Liability Management  Solvency  Credit Risk  Risk Management  Strategy