Microfinance Institutional Rating

1. Microfinance Ratings: What
use are they to investors?
Microfinance Institutional Ratings

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. 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. 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. 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. 5
Governance
&
Management
Corporate
governance
Strategy
Management
Responsible
decision
making
Mission
alignment

7. 6
Financial
profile
Financial
performance
Funding ALM
Solvency

8. 7
Operations
&
Organization
Loan
portfolio
quality
Human
resources
MIS
Internal
Control
and Audit

9. 8
Responsible
practices
Client
protection
Responsible
performance

10. 9
Microfinance
environment
Political, economic
and financial
environment
Legal & Regulatory
environment
Competitive
environment

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. 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. 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. MIR and credit rating
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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