MICROS: the rating of MFIs

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Paolo Sardi, Chief Executive Officer and Founding Partner - ECPI - Luxemburg

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MICROS: the rating of MFIs

  1. 1. MICROS: the rating of MFIs TBLI Conference, Amsterdam – 12th November 2009
  2. 2. Assessment of MFIs is driven by market demand and coherent with ECPI’s sustainability-related mission <ul><li>The market for microfinance has been significantly growing over the last few years, benefiting financial institutions and developing communities. </li></ul><ul><li>There is still interesting potential for market expansion. </li></ul><ul><li>ECPI developed a proprietary methodology to evaluate the sustainability of MFIs and the impact of their activity on local communities to help investors finance the best and least risky institutions. </li></ul>
  3. 3. ECPI - Mittel Group is a leading provider of ESG rating and indices <ul><ul><li>ECPI has been a leading provider of sustainability research, rating and Indices since 1997. </li></ul></ul><ul><ul><li>It is part of Mittel Group, a strong listed financial group, providing capital but also segregated freedom of action in its research activities. </li></ul></ul><ul><ul><li>ECPI is the market-leading provider of ESG (Environmental, Social and Governance) research, rating and Indices as a unique bundle of ESG products: </li></ul></ul><ul><ul><ul><li>Research and Rating </li></ul></ul></ul><ul><ul><ul><li>ECPI proprietary screening methodologies have evolved after a decade of work, resulting in a flexible tool for its clients. The database of 4,000+ issuers is periodically updated to provide maximum flexibility and exposure to the latest company ESG-relevant news. </li></ul></ul></ul><ul><ul><ul><li>Indices </li></ul></ul></ul><ul><ul><ul><li>ECPI has been working since 1997 on the creation of sustainable and thematic indices to integrate sustainability analysis in the investors’ investment process, by identifying fundamental performance-driving factors and making them investable. </li></ul></ul></ul><ul><ul><ul><li>ECPI Indices are available across all asset classes and distributed through all major data vendors, providing optimal accessibility. </li></ul></ul></ul><ul><ul><li>Bloomberg Page: ECPS<go> </li></ul></ul><ul><li>Reuters Page: ECAPITAL </li></ul><ul><li>Web: www.ecpindices.com </li></ul>
  4. 4. The assessment of MFIs is coherent with ECPI’s mission <ul><li>The market for Microfinance has been significantly growing over the last years, benefiting local communities in developing countries and financial institutions: microfinance is an emerging asset class. </li></ul><ul><li>However, it is estimated that one billion people still lack access to basic financial services: there is a significant demand untapped. </li></ul><ul><li>Microfinance is still far from reaching its potential. This is largely due to a lack of both funding resources and adequately structured investment vehicles. </li></ul><ul><li>MICROS </li></ul><ul><li>ECPI has developed a proprietary methodology to evaluate the sustainability of MFIs and the impact of their activity on local communities: </li></ul><ul><li>to increase transparency of investment products that imply exposure to Debt and/or Equity of those entities and consequently </li></ul><ul><li>to attract more investors to this market. </li></ul>
  5. 5. Actually only 9% of the market of microfinance demand is funded <ul><li>As of Jan 2008, the microfinance sector has an estimated total loan volume of USD 25 bn. </li></ul><ul><li>Yet, it is unable to serve more than a fraction (approx. 100 m) of total sector demand of roughly 1 bn micro-borrowers. </li></ul><ul><li>This situation translates into an immense funding gap estimated at around USD 250 bn. </li></ul>SOURCE: DB research, Meehan, CGAP, Dec 2007 SOURCE: The MIX based national poverty rates; ratio is based on borrower/poor, Dec 2007
  6. 6. Until 2015, is expected a 900% grow of private investments in microfinance <ul><li>By 2015 institutional and individual investments in microfinance is expected to rise sharply to around USD 20 bn. </li></ul><ul><li>Microfinance is gradually evolving into an asset class that will attract retail investors and benefit from the general strong rise in SRI. </li></ul><ul><li>Microfinance will appeal to a wider range of commercial investors as it might even be conducive to investors’ portfolio diversification. </li></ul><ul><li>In order to reach this goals, a critical mass of MFIs must be capable of absorbing foreign funding. </li></ul>
  7. 7. MICROS is meant to identify the best structured MFIs Third Party Assessment Transparency Increase Risk Reduction # of products and investors increase Funding Gap fill MICROS
  8. 8. MICROS adopts an approach similar to that applied to company ESG screening Intangible Value Screening Selection of the companies with high standards of corporate social and environmental responsibility in order to capture Corporate Intangible Value. <ul><li>The analysis focuses on the MFI critical success factors: </li></ul><ul><ul><li>the institution’s corporate and operational structure, and </li></ul></ul><ul><ul><li>the institution’s social impact. </li></ul></ul><ul><li>ECPI applies its screening to analyze sustainability and business risks of each MFI in a portfolio. </li></ul><ul><li>The analysis is designed to anticipate potential risk through a systematic and rule-based ratings approach that investigates the institution’s ability to run its business in the best possible way vis-à-vis the investors. </li></ul><ul><li>The goal of the methodology is the selection of the best in class MFIs. </li></ul>Recommended Candidates ECPI Company Screening Methodology Global Investment Universe Forward-Looking Approach In case of relevant news, factors such as reiteration, company reaction, malice, guilt and industry custom are taken into account The analysis has predictive goal ESG Screening Selection of businesses with high standards of corporate governance, social and environmental policies MICROS
  9. 9. Corporate governance Transparency CORPORATE SUSTAINABILITY (intent, strategies and systems) Performance Risk management Human capital Litigations Lending procedures Regulations MICROS analyzes the main operating areas of the MFI OPERATIONAL SUSTAINABILITY (policy and compliance) Portfolio Management team Employees Outreach SOCIAL SUSTAINABILITY (achievement of social goals)
  10. 10. CASE STUDY: MicroVentures, a success story <ul><li>MicroVentures is an initiative started in 2006 to invest in the most promising Microfinance Institutions (MFIs) in developing countries. </li></ul><ul><li>Among MicroVentures’ key investors and promoters: Italian leader entrepreneurs; private and banking foundations; family office and Italian financial institutions. </li></ul><ul><li>In less than 2 years, MicroVentures Spa (the first investment initiative) has build-up an active portfolio of 20 investments (equity and debt) into Indian and Latin American MFIs, actually serving more then one million clients, mainly women micro-entrepreneurs. </li></ul><ul><li>MicroVentures is now launching a Luxembourg Sicar to deliver consistent capital appreciation in the value of the assets by direct or indirect investments into the equity and quasi-equity instruments issued by MFI (Microfinance Institutions) mainly operating in Asia and Latin America. </li></ul><ul><li>The preliminary screening of the investable MFIs will include a governance due-diligence and a sustainability analysis. </li></ul>
  11. 11. Research Dept. Milan Piazza Diaz, 7 20123 Milan, Italy Tel +39 02 7214 11 Fax +39 02 72141616 www.ecpindices.com Bloomberg: ECPS <GO> Reuters: ECAPITAL Index Dept. Luxembourg 5, Rue Goëthe L-1637 Luxembourg Tel +352 26 845633 Fax +352 26 845634 Disclaimer This document has been prepared by Mittel Corporate Finance S.p.A. and/or any of its subsidiaries and affiliates, being noted that Mittel Corporate Finance S.p.A. is entirely owned by Mittel S.p.A., a company organized and existing under the laws of Italy, with registered office at Piazza Armando Diaz, n.7 I-20123 Milan, Italy (the “ECP Group Companies”) as part of their internal research activity. The information provided herein and, in particular, the data contained in this document are taken from information available to the public. All information contained herein is obtained from sources believed by it to be accurate and reliable. While the opinions and information contained in this document are based on public sources believed to be reliable and in good faith, ECP Group Companies have not independently verified the accuracy of such public sources. Because of the possibility of human, technical or whatsoever kind of similar error, however, such information is provided “as is” without warranty of any kind and ECP Group Companies, in particular, make no representation or warranty, whether express or implicit, as to the fairness, accuracy, timeliness, completeness, merchantability and/or fitness of any such information and opinions contained in this document. Accordingly, neither ECP Group Companies nor any of their respective directors, managers, officers or employees shall be held liable for whatever reason (including, without limitation, liability in negligence) for any loss (including consequential loss), expense, consequential, special, incidental, direct or indirect or similar damage, whether or not advised of the possibility of such damage, in connection with the fairness, accuracy, timeliness, completeness, merchantability and/or fitness of the information and opinions contained in this document and/or arising from any use or performance of this document or its contents or otherwise arising in connection with this document. Any opinions, forecasts or estimates contained herein constitute a high-level information statement only valid as at the date of its release. There can be no assurance that the evolution of the information contained herein and/or any future events will be consistent with such opinions, forecasts or estimates. Any information herein is at any time subject to change, update or amendment subsequently to the date of this document, with no undertaking by ECP Group Companies to notify such change, update or amendment. This document is not, nor may it be construed as to constitute a recommendation to make any kind of investment decision or an offer for sale or subscription of or a solicitation of any offer to buy or subscribe for any financial instrument. Accordingly, this document may not be used as a solicitation or an offer for sale or subscription, and any solicitation or offer shall be made only in accordance with all applicable laws and regulation, including, whenever applicable, the filing of a prospectus with the relevant authorities. ECP Group Companies are not financial advisors subject to special authorization and thus do not provide formal financial advice in the area of investment nor perform any asset management activity. ECP Group Companies recommend to potential investors wishing to be provided with formal financial advice in the area of investment to contact a financial advisor duly authorized by the competent regulatory authority of its country. ECP Group Companies publish researches on a regular basis. This publication has been prepared on behalf of ECP Group Companies solely for information purposes. All the information contained herein is copyrighted in the name of ECP Group Companies, and none of such information may be copied or otherwise reproduced, except for personal use only, further transmitted, transferred, published, disseminated, redistributed or resold, in whole or in part, in any form or manner or by any means whatsoever, by any person without ECP Group Companies’ prior written consent.

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