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Micro finanza rating, presentation, rbap 2012


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Micro finanza rating, presentation, rbap 2012

  1. 1. MicroFinanza Rating:HOW TO MAKE YOUR ORGANIZATION ATTRACTIVE Marco Boa Asia Regional Manager Rural Banks – 59th Annual National Convention 25 May 2012
  2. 2. 3 Factors in MicrofinanceHow is Microfinance evolving? GOVERNANCE REPUTATION FINANCIAL STRENGHTS 2
  3. 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) 3
  4. 4. Rural Banks overviewIncreased 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 4
  5. 5. Rural Banks overviewPerformances 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* 5 * APR 23% - 169%; Average 77%; estimated without insurance 38% - 54%**
  6. 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. 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 7
  8. 8. Financial Vs. Social performanceParabolic relation between clientprotection and financial performance(ROE and FSS) Improving the clientROE protection, from a weak to an adequate level, results in lower financialFSS gains, but upgrading the client protection from an adequate to good and very good goes along with higher ROE and FSS. Client protection 8
  9. 9. Private Equity: Worldwide Private Equity Transactions Peru, India and Mongolia350300 80 70 are the most active in250 60 50 equity valuations.200150 40 US$ M The drop in the book 30100 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 Average1.8 investments 1.71.6 1.61.4 1.4 1.41.2 1.2 1.1 1 0 Source: CGAP Research, Global Microfinance Equity 2005 2006 2007 2008 2009 2010 2011 Survey 2012 9
  10. 10. Philippines: Private Equity5 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 aNET 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 10
  11. 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 11
  12. 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. 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 13
  14. 14. Different approachesPre 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 RatingSocial 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) 14
  15. 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. 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: 16
  17. 17. BACK-UP SLIDES 17
  18. 18. Success StoriesMFI 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 18
  19. 19. Rating Methodology CRITERIAEconomic Context (4%)  Economic and political environment  The microfinance sector: structure & competition  Regulation & supervisionGovernance and strategy (23%)(4%) Ownership and Governance Management Strategy and market offer and positioning 19
  20. 20. Rating Methodology CRITERIAOrganization and Operations (21%)  Organizational structure  Human resources  Risk Management, Internal Control and Internal Audit  Accounting policies and procedures  IT and Management Information System 20
  21. 21. Rating Methodology CRITERIAAssets 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. 21
  22. 22. Rating MethodologyFinancial 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) 22
  23. 23. Social Rating ApproachAssess the capacity of the institution to put the mission intopractice Areas of AnalysisASocial Performance Systems 30% DO GOOD Clients Protection and SocialB Responsibility 25% DO NOTCOutreach 25% HARMDQuality of the SERVICES 20% 23
  24. 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 TACentral 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 24
  25. 25. The rating methodology evolution MICRO FINANCE SECTOR GROWTH + REPUTATIO N RISK 25
  26. 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. 26