Credit ratings measure the risk of default of a microfinance institution’s (MFI) obligations. The analysis for this rating includes an examination of quantitative and qualitative factors that assess the institution’s capacity to repay its financial obligations. MicroRate’s experience shows that both the quantitative and qualitative factors included in this analysis are essential in determining an MFI’s repayment capacity. MicroRate’s credit rating report also includes an analysis of external factors that are relevant to the institution, including the markets in which it operates and the microfinance environment. The credit rating report analyzes the following factors, following Basel II regulations:
- Country and microfinance sector risk
- Credit risk
- Operational Risk
- Market and liquidity risk
- Financial risk (profitability and solvency)
In order to accurately capture this information, MicroRate starts with a pre-visit desk analysis of data and information collected from the client. This is followed by a thorough on-site evaluation of the institution by two analysts. The on-site evaluation is followed by an analysis of all the data collected which is then consolidated into a final report. Prior to publication, the MFI is provided with a draft version of the report to review in order to ensure that there are no factual errors or misinterpretations. While the review of the draft does not influence MicroRate’s overall opinion, it provides the MFI with the opportunity to verify the data collected.
The final rating grade is a result of careful analysis and discussion by an International Rating Committee focusing on the five areas mentioned above. The International Rating Committee is composed of senior management and seasoned analysts from MicroRate’s different field offices to ensure consistent, robust analysis. In determining the final rating grade, no one risk is judged as being more important than others. Rather, the overall rating grade is not the result of weighting sub-rating grades, but is focused on the impact of each risk area on the MFI’s overall repayment capacity. The credit rating uses the Standard and Poor’s rating scale for all countries except in Peru, where MicroRate is regulated by the Peruvian Authority. For Peruvian MFIs, the rating scale uses the letters A to E as mandated by that authority.
Benefits of Rating:
MicroRate’s experience and international credibility allow MFI clients to benefit from our knowledge of microfinance to improve performance and attract funding. MicroRate’s credit rating enables MFIs to:
- Attract funding
- Compare their performance with international standards
- Comply with standard rating requirements of the regulatory authorities
MicroRate’s credit rating includes a pre-visit desk analysis, on-site evaluation, and final report. The entire process from the desk analysis to final report delivery is about 6-8 weeks.
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