Sustainable Microfinance Key Issues in developing institutional capacity of Microfinance Institutions Micro-Credit Ratings International Ltd 104 Qutab.

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  • Sustainable MicrofinanceKey Issues in developing institutional capacity of Microfinance InstitutionsMicro-Credit Ratings International Ltd104 Qutab Plaza, DLF City-1, Gurgaon 122002 Tel: +91 124 635 0835, 635 6692 Fax: +91 124 635 248912 February 2002

  • The context Widespread, endemic poverty in South Asia

    A growing microfinance sector in India and Nepal

    Large, well known microfinance programmes in Bangladesh

  • The context Ad hoc appraisal systems using a mix of financial and development assessment tools to appraise the performance of microfinance institutions

    Largely undertaken by individual consultants, academic institutions or, occasionally, western consultancy companies with mainly Latin American or African experience

    Such evaluators have limited Asian experience, mainly in Indonesia/Bangladesh

  • The contextIt became clear that a standardised tool was required in order to enable investors mainly lenders and donors to

    understand the risk profile and credit-worthiness of MFIs to estimate the appropriate volume of investments

    identify their strengths and weaknesses in order to determine their needs for institutional capacity building

  • Developing the toolEDA set out to develop a standardised tool for this purpose since it had

    a substantial research orientation considerable experience of monitoring studies been engaged in research on development appraisal methodologies substantive knowledge of microfinance a well-established reputation for quality, integrity and a knowledge of microfinance

  • Developing the toolThis was undertaken through

    An investment of 1.5 years at the most senior level Combining EDAs experience and knowledge with international best practice methodologies and feedback Consultations with microfinance specialists in the region Rigorous field testing of instruments across different microfinance models and geographical regions within India Continuous and iterative process of testing and improvement

  • Why rating?The methodology that emerged entailed the rating of MFIs

    Rating is about disclosure and accountability

    Rating provides a standard assessment comparable across organisations and over time

    It is undertaken by a team of professionals who specialise in the activity and work together to achieve a high degree of standardisation

    It is an internationally recognised service for investors who were the primary target of the initiative

  • The Rating Instrument

    The working hypothesis is that The risk profile and creditworthiness of an MFI depends critically on its financial performance, but is also affected by its managerial capabilities and governance

  • The rating instrumentGovernance issuesprofessional experience/involvement of board membersdominance of the leadershipstrategy and organisational structuredegree of focus on microfinancedegree of concentration of operations

  • The rating instrument Management/ resource indicators quality of managerial and field staff quality of accounts, MIS, tracking systems financial control systems strength and capability of clients adequacy and use of infrastructure

  • The rating instrumentFinancial performance level and growth of savings of members

    repayment rate (MFI-borrower and MFI-lender)

    age statement of overdues and portfolio at risk

    operating expense ratio, capital adequacy, financial sustainability

  • The rating instrumentFinancial statements adjusted for income recognition on loans on a cash basis

    adequate loan loss provisioning

    loan loss reserve

    cost allocation - especially important in the case of multi-service NGOs/MFIs sustainability calculations make the usual adjust- ments for inflation, cost of funds, all subsidies

  • Progress A total of 106 ratings done so far includes 88 MFIs in Asia and 18 rating updates

    Seven ratings have been in Bangladesh, four in Nepal and one each in Cambodia and Kazakhstan; a capitalisation review of three MFIs in Myanmar was undertaken last year

    Over the next few months M-CRIL will be rating MFIs in Indonesia, Pakistan, Sri Lanka and the Philippines

  • Grade distribution 86 MFI ratings










    Risk category



    S NoOrgn-codeCompleted ratings: Organisation namesType of ratingCountry


    2BEESBangladesh Extension Education ServicesFirstBangladesh

    3BUROBangladesh Unemployed Rehabilitation Organisation, TangailFirstBangladesh

    4BURO-T-U1Bangladesh Unemployed Rehabilitation Organisation, TangailUpdate 1Bangladesh

    5ShaktiShakti Foundation- for disadvantaged womenFirstBangladesh

    6VARDVoluntary Association for Rural DevelopmentFirstBangladesh

    7EMTEnnatien Moulethan TchonnebatFirstCambodia

    8AMCCSAnnapurna Mahila Credit Cooperative Society Ltd.FirstIndia

    9ANaRDEACIL-Navasarjan Foundation for Rural DevelopmentFirstIndia

    10APDCSFLAnkuram Sangamam PoramFirstIndia

    11ASAActivists for Social AlternativesFirstIndia

    12ASSEFAAssociation of Sarva Seva FarmsFirstIndia


    14Assist-U1ASSIST, Guntur, Andhra PradeshUpdate 1India

    15BAIF-DHURVADharampur Utthan VahiniFirstIndia

    16BASIXBharatiya Samruddhi Finance LtdFirstIndia

    17BDMSABanaskantha DWCRA Mahila SEWA AssociationFirstIndia

    18BWDABullockcart Workers' Development AssociationFirstIndia

    19CARDCreative Action For Rural DevelopmentFirstIndia

    20CARD-PCommunity Action for Rural Development - PuddokottaiFirstIndia

    21CCDThe Covenant Centre for DevelopmentFirstIndia

    22CECOEDECONCentre for Community Economics and Development Consultants SocietyFirstIndia

    23CFTSCashpor Financial and Technical services Pvt LtdFirstIndia

    24CFTS-RCashpor Financial and Technical Services LtdUpdate 1India

    25CHINYARDChaitanya Institute for Youth and Rural DevelopmentFirstIndia

    26CPSWCouncil of Professional Social WorkersFirstIndia

    27CRUSADECentre for Rural Systems and DevelopmentFirstIndia

    28CYSDCentre for Youth and Social DevelopmentFirstIndia

    29FWWBFriend's of women's world banking, IndiaFirstIndia

    30FWWB-RFriends of Women's World Banking, IndiaUpdate 1India

    31GDSGrameen Kosh (Grameen Development Services )FirstIndia


    33IASCIndian Association for Savings and CreditFirstIndia

    34ICECDInternational Centre for Entrpreneurship and Career DevelopmentFirstIndia

    35ICNWIndian Cooperative Network for Women LimitedFirstIndia

    36IIWCHTIndian Institute of Women and Child Health TrustFirstIndia

    37IIYWIndian Institute for Youth WelfareFirstIndia

    38JMSSMJunagadh Mahila Sharafi Sahakari Mandli LtdFirstIndia

    39KoshSarva Jana Seva KoshFirstIndia

    40LEADLeague for Education and DevelopmentFirstIndia

    41MALARMahalir Association for Literacy, Awareness and RightsFirstIndia

    42MERIBAMission to Encourage Rural Development in Backward AreasFirstIndia

    43NBJKNav Bharat Jagriti KendraFirstIndia

    44NBJK_RNav Bharat Jagriti KendraUpdate 1India


    46PDAFPune District Agriculture Development FoundationFirstIndia

    47PREMPeople's Rural Education MovementFirstIndia

    48P-SAMITIPustikar Laghu Vyaparik Pratisthan Bachat Avam Sakh Sahakari Samiti LtdFirstIndia

    49PWMACTSPayakaraopeta Women's Mutually Aided Cooperative Thrift and Credit Society LtdFirstIndia

    50RASSRastriya Seva SamanthiFirstIndia

    51RASS-U1Rastriya Seva SamanthiUpdate 1India

    52RDORural Development OrganisationFirstIndia

    53RGVNRashtriya Gramin Vikas NidhiFirstIndia

    54RGVNCSPRashtriya Gramin Vikas Nidhi - Credit and Savings ProgrammeFirstIndia

    55RGVNCSP-RRashtriya Gramin Vikas Nidhi - Credit and Savings ProgrammeUpdate 1India

    56RIDORural Integrated Development OrganisationFirstIndia

    57RLEKRural Litigation Entitlement KendraFirstIndia


    59SACREDSociety for Action in Creative Education and DevelopmentFirstIndia

    60SamruddhiBhartiya Samruddhi Finance Limited (BASIX)Update 1India

    61SARSSouth Asia Research SocietyFirstIndia

    62SASSSSt Anns Social Service SocietyFirstIndia

    63SEBASeba SanghaFirstIndia

    64SEWAShri Mahila SEWA Sahakari Bank Ltd. (SEWA Bank)FirstIndia

    65SHARESociety for Helping, Awakening of Rural Poor through Education (SHARE)FirstIndia

    66ShepherdSelf Help Promotion for Health and Rural DevelopmentFirstIndia

    67ShramikbShramik BhartiFirstIndia

    68SIFFSSouth Indian Federation of Fishermen Societies (SIFFS)FirstIndia

    69SKVISSunderban Khadi & Village Industrial SocietyFirstIndia

    70SMLSHARE Microfin LimitedFirstIndia

    71SnehaSneha Women's Thrift and Credit Mutually Aided Co-operative Soceity limitedFirstIndia


    73SPARCSociety for Promotion of Area Resource CentreFirstIndia

    74SWDMACTSSwayamkrushi Women's Development Mutually Aided Cooperative Thrift SocietyFirstIndia

    75SYAStar Youth AssociationFirstIndia

    76TBFThe Bridge FoundationFirstIndia

    77TREESTreatment for Rural Environmental Educational SocietyFirstIndia

    78VJNNSVisakha Jilla Nava Nirmana SamitiFirstIndia

    79VMMVasavya Mahila MandaliFirstIndia

    80VSKVivekananda Sewa Kendra O Shishu NiwasFirstIndia

    81VWSVillage Welfare SocietyFirstIndia

    82VWS-U1Village Welfare SocietyUpdate 1India

    83YCOYouth Charitable OrganisationFirstIndia

    84YUVAYouth for Unity and Voluntary ActionFirstIndia

    85YVUYouth Volunteers Union (YVU)FirstIndia

    86NirdhanNirdhan Utthan Bank LimitedFirstNepal

    87NSSCNeighbourhood Society Service CentreFirstNepal

    88RRNRural Reconstruction NepalFirstNepal


    90LEAD-U1League for Education and DevelopmentUpdate 1India

    91SCRIASocial Centre for Rural Initiative and AdvancementFirstIndia

    92CARD-U1Creative Action For Rural DevelopmentUpdate 1India

    93SKSSwayam Krishi SangamFirstIndia

    94WOTRWatershed Organisation TrustFirstIndia

    95SnehaSneha Women's Thrift and Credit Mutually Aided Co-operative Soceity limitedUpdate 1India

    96SARSSouth Asia Research SocietyUpdate 1India

    97ASAActivists for Social AlternativesUpdate 1India

    98SIFFSSouth Indian Federation of Fishermen Societies (SIFFS)Update 1India

    99MGDJSNMatashree Gomti Devi Jana Seva NidhiFirstIndia

    100SamruddhiBhartiya Samruddhi Finance Limited (BASIX)Update 2India



    103SNFSarvodaya Nano FinanceFirstIndia


    105GDSUpdate 1India

    106SEEDSFirstSri Lanka

    107Shakti FUpdate 1Bangladesh

    108Moris RasikFirstEast Timor


    Count of Orgn-codeType of rating

    CountryFirstUpdate 1Update 2Grand Total



    East Timor110




    Sri Lanka110

    Grand Total90171108105



    Gamma plus4

    Beta minus11


    Beta plus20

    Alpha minus14


    Alpha plus6



    Risk category


  • Promoting transparency Achievement 1 helping to overcome information asymmetry

    Makes lenders/donors aware of issues affecting creditworthiness emphasises for the sceptics amongst investors, MFIs enable provision of financial services to those the banks dont reach a substantive poverty focus a prudent approach to client savings responsibility in ensuring the repayment of loans from banks

    most importantly, many are at or near sustainability, therefore, good investments for either loans or equity

  • Promoting transparency Key weaknesses found amongst many MFIs in India

    lack of a business orientation which limits sustainability most MFIs in the region emerge from NGOs with a social agenda

    perceive microfinance as extension of social development not financial intermediation affects orientation/systems many are leader dominated institutions with centralised decision making, which

    affects receptivity to ideas, limits response to market opportunities

  • Promoting transparencyTypical systemic weaknesses found in Indian MFIs

    incomplete understanding of client needs/product design poor loan tracking and follow up

    lack of incentives for staff accounting deficiencies

    failure to take account of income accruals

    rescheduling and refinancing of client loans

    (minor) cases of fraud undetected on account of poor MIS/internal audit processes

  • Promoting transparency Rating has enabled such issues to be highlighted and discussed between lenders/donors and MFIs

    Some public transparency is also starting to happen as some MFIs now make their rating reports public this puts pressure on others to do so

    CGAP Fund imposes public disclosure of the rating report as a condition for its support

  • Establishing internal accountabilityAchievement 2: 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

  • Strengthening links with investorsAchievement 3: Detailing information on the risk profile of MFIs has facilitated substantive links with investors

    Lending of the order of $7 million by SIDBI to some 50 MFIs in India, others such as ICICI Bank and HDFC have also used M-CRIL ratings for this purpose

    Capitalisation of MFIs in India, Bangladesh, Myanmar by Hivos, DFID, SDC, UNDP used in Bangladesh to facilitate a credit guarantee mechanism

  • Strengthening links with investors

    Lending of the Dexia Micro-Fund in India, Cambodia of funds managed by Blue Orchard Finance interested in further inputs vis--vis the Philippines and Indonesia

    Womens World Banking also using the service to support its affiliates in Asia Bank Dagang Bali to be rated soon

  • Enabling development of standardsAchievement 4: In India due to the resulting database this has facilitated the process of developing industry standards related to performance and systems efficiency OER
  • ConclusionM-CRILs experience is that institutional assessments based on accepted standards can be a very powerful tool in promoting institutional capacity building of MFIs but to be effective, the service must be provided by a professional team dedicated to microfinance, having the specialist knowledge and experience that goes with that dedication

    committed to the long term development and growth of the microfinance sector.

    Donor Committee on Small Enterprises, ACCION, SEEP Network, NFCDLF, NFCCU, Seed Capital Development Fund, work of Philippine Coalition on Microfinance on standardsFive rounds of field testing with 14 MFIs in different parts of India sufficient geographical and methodological diversity initially only Indian MF sector in mind rather than one that sees microfinance ratings merely as a business opportunity utilised while corporate sector demand stagnates but to be discarded like an old sock when the world economy revives.


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