Microfinance ratings

1. Microfinance ratings M-CRIL’s rating services Micro-Credit Ratings International Ltd 602 Pacific Square, 32nd Milestone NH8, Gurgaon 122001 INDIA contact@m-cril.comTel: +91 124 230 9497, 230 9707 Fax: +91 124 230 9520

2. What is a rating? • A standardised tool to enable investors – mainly lenders and donors – to • understand the risk profile and credit-worthiness of micro- • banks/MFIs – bothin absolute terms and in relation to other • similar institutions • estimate the absorptive capacity of MFIs and estimate the • risk associated with lending to each institution • the Social Rating provides feedback on the MFI’s ability to • achieve the development impact it seeks • M-CRIL’s ratings were launched specifically to facilitate the • flow of socially responsible funds into microfinance

3. Why commission a rating? • A combination of a number of possibilities • Investors/lenders’ decisionsare facilitated as the rating • serves as a significant part of appraisal/ “due diligence” process • MFI is able to approach investorswith an independent • assessment - if it has commissioned the report directly • & further the rating identifies MFI strengths and weaknesses enabling • Initiatives by the MFI to improve performance with own • resources or donor support

4. The Rating Model The working hypothesisis that The risk profile and creditworthiness of an MFI depends critically on its financial performance, but the risk associated with its future performance is crucially determined by its managerial capabilities and governance

5. Rating Instrument - segments • Governance & strategy – determines continuity, transparency, ability to grow & work within cost parameters, minimise risk • Management –assesses HR policies, MIS, internal controls, tracking and follow up of overdues – overall risk management • Financial performance – comments on the portfolio quality and current and historical profitability/sustain-ability of the MFI – includes PAR, RoA as the key factors

6. Rating Methodology • Scheduling • Start-up • discussion with head of operations • head office data collection • Field visit • branch visits & data collection • MIS verification • client interaction • Follow up & de-briefing • discussion of preliminary analysis • filling data gaps at M-CRIL at the MFI

7. Rating Methodology…continued at M-CRIL • Data analysis • & report writing • Draft report to MFI • for feedback • report revision based on feedback • Review by Rating Committee • MFI views presented alongside • final decision on grade & recommendation • Report finalised • and submitted to client

8. M-CRIL’s rating grades a++ Highest safety, very good systems most highly recommended a+Very high safety, good systems highly recommended aHigh safety, good systems highly recommended a-Reasonable safety, good systems   recommended b+ Reasonable safety, reasonable systems recommended, needs monitoring bModerate safety, moderate systems     acceptable, needs improvement to handle large volumes

9. M-CRIL’s rating grades… continued b-Significant risk, poor to moderate systems acceptable only after improvement g+Substantial risk, poor systems needs considerable improvement g Highest risk, poor systems not worth considering

10. Grade distribution Credit-worthiness threshold 163 MFIs

11. M-CRIL’s record of pioneering products • Credit rating: M-CRIL pioneered the introduction of credit rating (rather than performance assessment) of MFIs. • Quarterly monitoring: M-CRIL undertakesquarterly monitoring and semi-annual desk reviews of MFI performancewhen specifically contracted for this purpose. • Social Rating:M-CRIL has introduced social rating – to assess and compare the social performance of MFIs. M-CRIL is the world-wide pioneer of this product as a rating product, launched in 2005. • Sector Studies and Reviews: M-CRIL also undertakes studies of issues in the performance of the microfinance sector in its countries of operation.Such studies have covered aspects like microfinance policy, best practices in MF delivery, micro-insurance and the microfinance market in a number of countries

12. M-CRIL’s progress • A total of 351 ratings done by end-April 2006 – cover 224 MFIs and 127 rating updates; 30 MFIs rated 3 or more times • In addition to India, ratings/assessments have been in Afghanistan, Azerbaijan, Kazakhstan, Georgia in Central Asia/Caucasus as well as Bangladesh, Cambodia, East Timor, Indonesia, Myanmar, Nepal, Pakistan, Philippines, Samoa & Sri Lanka • M-CRIL has rated MFIs having 39 to 370,000 active clients. The outstanding portfolio of rated MFIs ranges from US$9,000 to US$30 million. M-CRIL has ratedMFIs across many organisational forms (Society, Cooperative, Trust, Company, Bank etc) and all microfinance models • M-CRIL has undertakenratings or sectoral research studies in 18 countries – other 3 areTajikistan, Vietnam & Papua New Guinea

13. In the region, M-CRIL has… • Rated/assessed 6 organisations Kazakhstan Loan Fund Micro Finance Bank of Azerbaijan Small Business Development Foundation Georgia Rural Development Foundation BRAC Afghanistan MoFAD of CARE Afghanistan • Led an impact assessment study of micro-enterprise lending by commercial banks in Tajikistan

14. M-CRIL’s expertise in rating updates

15. Strengthening links with investors • Achievements: Providing an assessment of the risk profile of MFIs has facilitated substantive links with investors • Lending of the order of $450 million to over 100 MFIs in • the countries where it has worked, by apex institutions, • commercial banks and social investment funds • Capitalisation of MFIs by Hivos, DFID, SDC, • UNDP and other investors

16. Establishing internal accountability • Achievements: Identifying strengths and weaknesses • – prioritises capacity building needs • – specific recommendations facilitate capacity building support • financial/yield analysis and delinquency management • loan tracking systems and MIS • financial control – budgeting, cash planning & internal audit • staff skill improvements through better recruitment and • training • better governance + focus on microfinance as specialised • financial intermediation not social development • Many MFIs use rating reports to strengthen operations • though new problems can appear as the MFI grows

17. Establishing social accountability • Achievements: M-CRIL’s Social Rating product establishes the MFI’s commitment to its social mission and goals vis-à-vis microfinance • The product covers • the status of systems and feedback mechanism for • achieving social goals • depth of outreach to poor/disadvantaged clients • responsiveness to the needs of those clients • M-CRIL has undertaken 8 social ratings so far and is undertaking several more over the next few months

18. Why M-CRIL… M-CRIL understands the region • it is located in the neighbourhood and has worked in a number of areas with post-Soviet economies (Azerbaijan, Georgia, Kazakhstan) • and others affected by conflict and difficult conditions of governance (Afghanistan, Cambodia, Myanmar, Nepal)

19. Conclusion… …M-CRILis the most experienced MFI rating institution in the world. Also has a specialist knowledge of microfinance and socio-economic conditions in Asia – including Central Asia in order to provide an internationally competitive, highly competent & trustworthy service

20. TIME Magazine: 100 People Who Shape Our World