Post on 05-Feb-2015
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MicroFinanza Rating: HOW TO MAKE YOUR ORGANIZATION
ATTRACTIVEMarco Boa
Asia Regional Manager
Rural Banks – 59th Annual National Convention25 May 2012
3 Factors in Microfinance
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GOVERNANCEGOVERNANCE
REPUTATIONREPUTATION
FINANCIAL STRENGHTSFINANCIAL STRENGHTS
How is Microfinance evolving?
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)
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Rural Banks overview
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Increased 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
Rural Banks overview
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Performances to be consolidated
CAR = 18%CAR = 18% ADEQUATE
PD = 15%
Risk Coverage 40%
Portfolio Growth 9.4%
Portfolio Yield 20% <> APR*
Putting pressure on
ROA and potentially
on the CAR
* APR 23% - 169%; Average 77%; estimated without insurance 38% - 54%**
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?
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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
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Financial Vs. Social performance
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Parabolic relation between client protection and financial performance (ROE and FSS)
ROE
FSS
Client protection
Improving the client protection, from a weak to an adequate level, results in lower financial gains, but upgrading the client protection from an adequate to good and very good goes along with higher ROE and FSS.
Private Equity: Worldwide
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01020304050607080
0
50
100
150
200
250
300
350
2005 2006 2007 2008 2009 2010 2011
Private Equity Transactions
US$ M
no.
1.1 11.2
1.4
1.7 1.61.4
00.20.40.60.8
11.21.41.61.8
2005 2006 2007 2008 2009 2010 2011
P/BV Average
Source: CGAP Research, Global Microfinance Equity Survey 2012
Peru, India and Mongolia are the most active in equity valuations. The drop in the book value multiplier was due to a deterioration of assets (India), but with a continuation of investments
Philippines: Private Equity
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5 Variables important for Equity Valuations5 Variables important for Equity Valuations
GOVERNANCE •Supervision and independent audit framework • Management quality
PORTFOLIO QUALITY •10% PAR 30 it is not attractive for investors
NET INCOME GROWTH•Net income growth prospects contribute to a premium in the valuations •Efficiency
MARKET PENETRATION and
FRANCHISE
Considering the regional coverage, competitive services customized and tailored for the target in a specific geographic area
EXIT STRATEGYPrivate equity investments are limited (7 years on average). Secondary market or family itself willingness to buy back are usually taken into consideration
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 AmericaMexico: for Mexican MFIsKenya: covering AfricaKyrgyz Republic: covering NIS
and Central AsiaPhilippines: covering Asia
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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).
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3353
81
111 116 123137
2005 2006 2007 2008 2009 2010 2011
Microfinance Rating vs Credit Rating
RATING is not: An audit A consultancy or technical assistance It is not a due-diligence
It is often expressed through a scale of grades which summarizes the definition of the level of credit risk.
An evaluation of the risk profile and the 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 IN MICROFINANCE
RATING IN MICROFINANCE
An evaluation of the solvency of a financial institution. It can be applied to an institution
or to the debt issued by an institution. It is often expressed through a scale of grades which
summarizes the definition of the level of credit risk.
CREDIT RATING
CREDIT RATING
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NOW with CLIENT
PROTECTION CERTIFICATION
Different approaches
Pre Rating Services
Financial Rating
Social Rating
Training and Other
- Mini – Assessment- Institutional Diagnostic
- Microfinance rating- Credit Rating
- Standard Social Rating- Comprehensive Social Rating
- 6 Training Modules- Other customized services (e.g. Country Screening)
Identification of the main internal weaknesses jointly with the existing opportunities and areas for improvement.
Evaluation of the risk profile and performances
Assessment of the MFI’s capacity to translate its mission into practice and to achieve its social goals.
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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
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Contacts
Thank you!!!
MicroFinanza Rating INC.: Unit 34 Cattleya Gardens, 111 C. Palanca St., Legazpi Village, 1229 Makati City - Philippines
Phone: +63 2 8173767Email: marco.boa@microfinanzarating.com
www.microfinanzarating.com info@microfinanzarating.com 16
BACK-UP SLIDES
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Success Stories
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MFI 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
Rating Methodology CRITERIA
Economic and political environment The microfinance sector: structure & competition Regulation & supervision
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Economic Context (4%)
Governance and strategy (23%)(4%) Ownership and Governance Management Strategy and market offer and positioning
Rating Methodology CRITERIA
Organizational structure Human resources Risk Management, Internal Control and Internal Audit Accounting policies and procedures IT and Management Information System
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Organization and Operations (21%)
Rating Methodology CRITERIA
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Assets 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.
Rating Methodology
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Financial 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)
Social Rating Approach
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Assess the capacity of the institution to put the mission into practice
Areas of Analysis
ASocial Performance Systems 30%
BClients Protection and Social Responsibility 25%
C Outreach 25%
DQuality of the SERVICES 20%
DO GOOD
DO NOT HARM
Success Stories
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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 TA
Central 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
The rating methodology evolution
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MICRO FINANCE SECTOR
GROWTH +
REPUTATION RISK
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The process
Final reportPreparation of the final report after discussion and deliberation by the Rating Committee Unit.
Preliminary analysis
Preliminary analysis of basic documents sent by the MFI (financial statements, company profile, other documents, questionnaires sent by Microfinanza Rating).
Field visit Two Microfinanza Rating analysts. Activities: interviews and meetings with managers, employees and directors, info collection, visit to the branches, meetings with other relevant actors.
Draft reportPreparation of a first draft of the report to be submitted to the MFI for feedback.