1. MicroFinanza Rating:
HOW TO MAKE YOUR ORGANIZATION
ATTRACTIVE
Marco Boa
Asia Regional Manager
Rural Banks – 59th Annual National Convention
25 May 2012

2. 3 Factors in Microfinance
How is Microfinance evolving?
GOVERNANCE
REPUTATION
FINANCIAL STRENGHTS
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3. Philippines Positioning
• Increased competition from commercial banks
• Consolidation of RBs need to be proved in the
short-medium term
• Financial Exclusion and over-indebtedness
• Closure of few RBs might affect trust
• Performances to be consolidated (portfolio
quality)
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4. Rural Banks overview
Increased competition from Commercial Banks
As of September 2011 Saving deposits in RBs
decreased by 2% y-o-y. Aggregate Savings
in the banking sector grew by 11% y-o-y
Some of Commercial BANKS are
downscaling
…BUT Lower end SME Lending (also
through Value Chain Financing) can be
positively affected by the current
macroeconomic fundamentals, including
agri-business
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5. Rural Banks overview
Performances to be consolidated
CAR = 18% ADEQUATE
PD = 15%
Risk Coverage Putting pressure on
40%
ROA and potentially
Portfolio
Growth 9.4% on the CAR
Portfolio Yield
20% <> APR*
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* APR 23% - 169%; Average 77%; estimated without insurance 38% - 54%**

6. Looking Forward
• How working on client protection
can improve the performances?
• Can the potential opening of foreign
equity investors in Rural Banks
strengthen the bank positioning?
6

7. 7 Principles
• Appropriate product design and delivery
• Prevention of over-indebtedness
• Transparency
• Responsible pricing
• Fair and respectful treatment of clients
• Privacy of client data
• Mechanisms for complaint resolution
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8. Financial Vs. Social performance
Parabolic relation between client
protection and financial performance
(ROE and FSS)
Improving the client
ROE protection, from a weak
to an adequate level,
results in lower financial
FSS gains, but upgrading the
client protection from an
adequate to good and
very good goes along
with higher ROE and
FSS.
Client protection
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9. Private Equity: Worldwide
Private Equity Transactions Peru, India and Mongolia
350
300
80
70
are the most active in
250 60
50
equity valuations.
200
150
40 US$ M The drop in the book
30
100 20
no.
value multiplier was due
50
0
10
0
to a deterioration of
2005 2006 2007 2008 2009 2010 2011 assets (India), but with a
continuation of
P/BV Average
1.8
investments
1.7
1.6 1.6
1.4 1.4 1.4
1.2 1.2
1.1
1 1
0.8
0.6
0.4
0.2
0
Source: CGAP Research, Global Microfinance Equity
2005 2006 2007 2008 2009 2010 2011
Survey 2012 9

10. Philippines: Private Equity
5 Variables important for Equity Valuations
•Supervision and independent audit framework
GOVERNANCE • Management quality
PORTFOLIO QUALITY •10% PAR 30 it is not attractive for investors
•Net income growth prospects contribute to a
NET INCOME GROWTH premium in the valuations
•Efficiency
MARKET Considering the regional coverage, competitive
PENETRATION and services customized and tailored for the target in a
specific geographic area
FRANCHISE
Private equity investments are limited (7 years on
average). Secondary market or family itself
EXIT STRATEGY willingness to buy back are usually taken into
consideration
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11. Who we are
 Private and independent rating agency specialized in microfinance and rural
finance
 Rating agency registered in the IADB Rating and Assessment Fund and in the
ADA Microfinance Rating and Assessment Initiative
 Headquarters are in Milan (Italy) with 5 offices in 4 continents
 Ecuador: covering Latin America
 Mexico: for Mexican MFIs
 Kenya: covering Africa
 Kyrgyz Republic: covering NIS
and Central Asia
 Philippines: covering Asia
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12. Market coverage
 More than 750 evaluations in 70 countries
 LARGEST MARKET SHARE in 2008 according to the last ADA-KPMG
“Rating Market Outlook Report 2009”
 MicroFinanza Rating has pioneered the social rating for microfinance
institutions, developing an innovative methodology which include the
direct collection of client-level data (120 SR conducted so far).
137
123
111 116
81
53
33
2005 2006 2007 2008 2009 2010 2011 12

13. Microfinance Rating vs Credit Rating
An evaluation of the solvency of a financial
CREDIT
RATING
institution. It can be applied toof grades which
It is often expressed through a scale an institution
summarizesdebt issued by an institution.
or to the the definition of the level of credit risk.
It is often expressed through a scale of grades which
summarizes the definition of the level of credit risk.
RATING IN
An evaluation of the risk profile and the
MICROFINANCE performance of a financial institution
specialized in microfinance.
It is often expressed through a scale of grades which
summarizes the definition of the level of risk and
performance
RATING is not: NOW with
 An audit CLIENT
 A consultancy or technical assistance PROTECTION
 It is not a due-diligence CERTIFICATION
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14. Different approaches
Pre Rating Services
Identification of the main internal weaknesses jointly
- Mini – Assessment
with the existing opportunities and areas for
- Institutional Diagnostic
improvement.
Financial Rating
- Microfinance rating Evaluation of the risk profile and performances
- Credit Rating
Social Rating
- Standard Social Rating Assessment of the MFI’s capacity to translate its mission
- Comprehensive Social Rating into practice and to achieve its social goals.
Training and Other
- 6 Training Modules
- Other customized services (e.g. Country Screening)
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15. Why a Rating
 To enhance the visibility and reputation of your
Financial Institution across the industry and towards
clients (especially savers)
 To attract external funding in the form of equity or
debt to your Financial Institution
 To highlight your strengths and weaknesses for
improving your internal management
 To acknowledge your level of operations and
transparency towards the Regulator
 To compare financial and operational performance
with international best practices 15

16. Contacts
Thank you!!!
MicroFinanza Rating INC.:
Unit 34 Cattleya Gardens, 111 C. Palanca St.,
Legazpi Village, 1229 Makati City - Philippines
Phone: +63 2 8173767
Email: marco.boa@microfinanzarating.com
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www.microfinanzarating.com info@microfinanzarating.com

17. BACK-UP SLIDES
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18. Success Stories
MFI in Cambodia – Sound growth
 Rating in 2007: BBB
 Portfolio USD 6 M
 Borrowings USD 3.8
 Rating in 2008: A+
 Portfolio USD 28 M
 Borrowings USD 20
 Rating in 2010: A-
 Portfolio USD 44 M
 Borrowings USD 31 M
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19. Rating Methodology CRITERIA
Economic Context (4%)
 Economic and political environment
 The microfinance sector: structure & competition
 Regulation & supervision
Governance and strategy (23%)
(4%)
 Ownership and Governance
 Management
 Strategy and market offer and positioning
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20. Rating Methodology CRITERIA
Organization and Operations (21%)
 Organizational structure
 Human resources
 Risk Management, Internal Control and Internal Audit
 Accounting policies and procedures
 IT and Management Information System
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21. Rating Methodology CRITERIA
Assets structure and quality (21%)
 Asset structure and management
- Concentration in the core business, etc.
 Loan Portfolio structure
- Diversification (geographical, activity, term, product, etc),
evolution, outreach, etc.
 Loan Portfolio quality
- PAR, portfolio in arrears, write-offs, provisions, reserves,
restructured portfolio, etc.
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22. Rating Methodology
Financial Structure and Management (18.5%)
 Solvency Risk (capital adequacy ratio)
 Indebtedness composition and stability (Borrowings and
deposits trends)
 Funding Plan and future cash flow
 Assets and Liability management (impact of the funding
structure management on liquidity and market risks)
Operational results (12.5%)
 Financial and operational performance (Profitability and
sustainability and Efficiency and productivity)
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23. Social Rating Approach
Assess the capacity of the institution to put the mission into
practice
Areas of Analysis
ASocial Performance Systems 30% DO GOOD
Clients Protection and Social
B
Responsibility
25%
DO NOT
COutreach 25% HARM
DQuality of the SERVICES 20%
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24. Success Stories
Central Asia Social Performance Initiative
 Social Rating of 4 MFIs in Central Asia
 Analysis of the mission and the clientele poverty profile
 Donor Support and other social investor to implement TA
Central Bank Philippines and Rating Recognition
 Close collaboration with Rural banking sector through
TRAININGS
 Microfinance Rating accredited by the Central Bank
 NEXT STEP: Leverage from the information sharing
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25. The rating methodology evolution
MICRO
FINANCE
SECTOR
GROWTH
+
REPUTATIO
N RISK
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26. The process
Preliminary analysis of basic documents sent by the MFI
Preliminary
(financial statements, company profile, other documents,
analysis
questionnaires sent by Microfinanza Rating).
Two Microfinanza Rating analysts. Activities: interviews and
Field visit meetings with managers, employees and directors, info collection,
visit to the branches, meetings with other relevant actors.
Preparation of a first draft of the report to be submitted to the MFI
Draft report
for feedback.
Preparation of the final report after discussion and deliberation by
Final report the Rating Committee Unit.
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