Evaluation of Microfinance Rating Reports: Do They Serve the Real Purpose?

This paper examines whether the current rating reports satisfy their intended function
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This paper, presented in slideshow format, tries to examine whether current rating reports of microfinance institutions (MFIs) satisfy their intended purpose, given their importance in raising capital for MFIs. The paper analyzes the rating reports of five major rating agencies. The paper adopts the perspective of an investor wanting to invest in an MFI. It focuses on understanding the following:

  • What do investors generally expect out of rating reports?;
  • What kind of information do investors extract from rating reports?;
  • How useful are the reports actually in fulfilling the investors’ information needs?

Accordingly, the author makes suggestions on how the reports can be improved, and concludes that reports can be improved by:

  • Organizing ratios around the drivers for value creation (growth, profitability, risk) and providing qualitative comments to support each driver;
  • Including aspects related to country risk and structurally analyzing the industry;
  • Profiling the promoters, benchmarking the overall processes and information systems;
  • Covering the social impact and outreach of the MFI;
  • Incorporating projected financial statements or at least a projection of basic indicators;
  • Providing a comprehensive benchmarking analysis using broader ratios and a relevant peer set.