Factors Explaining the Rating of Microfinance Institutions

Abstract

The growing relevance of Microfinance Institutions (MFIs) has provoked the development of specialized MFI rating agencies that perform global risk assessments. In this paper we have conjectured different hypotheses pertaining to the relationship between financial indicators and the rating assigned. The hypotheses have been empirically tested, using MFIs accounting information and ratings from a leading agency. As expected, the larger, the more profitable, the more productive, and the less risky, achieved the better rating. This proves the usefulness of MFIs ratings for providers of funds. There is no observed relationship between social performance and rating. Given the social aim of MFIs, it is necessary to encourage rating agencies to engage in the development of social ratings. These social ratings should complement financial ratings, giving information about the accomplishment degree of the MFI social goals. JEL Classification: G290

An Analysis of the Drivers of Microfinance Rating Assessments

“…In principle, any corporation or organization can be rated, including MFIs, but the number of MFIs with credit ratings is still small (Gutiérrez-Nieto & Serrano-Cinca, 2007). These traditional rating services are exclusively concerned with repayment risk; the ratings signal the likelihood that a specific debt obligation will be paid on time.…”

“…Furthermore, even if the GDP-adjusted loan size is the most frequent proxy for social performance used by researchers as well as donors and investors (Cull, Demigüc-Kunt, & Morduch, 2007, Mersland & Strøm, 2010, one may claim that this variable does not fully capture the social performance dimension. Thus, we also test alternative proxy variables (see Gutiérrez-Nieto & Serrano-Cinca, 2007). First, we apply average loan size without the GDP adjustment.…”

A meta-analysis examining the nature of trade-offs in microfinance

“…Rating agencies take into account a number of factors while assessing institutional performance such as management, capital adequacy, portfolio quality, growth prospects, efficiency, risk, rates of return and social performance (Beisland and Mersland, 2012). Current evidence finds that better ratings are associated with larger, more profitable, more efficient and less risky MFIs (Gutiérrez-Nieto and Serrano-Cinca, 2007;Beisland and Mersland, 2012).…”

Determinants of the governance quality of microfinance institutions

“…To answer the first question, we modeled governance effectiveness as a function of board characteristics (model 1). The approach used to achieve this objective follows that of previous studies on the ratings of MFIs and nonfinancial companies (Ashbaugh-Skaife, Collins, & LaFond, 2006;Bhojraj & Sengupta, 2003;Gutiérrez-Nieto & Serrano-Cinca, 2007;Tchakoute Tchuigoua, 2012). Indeed, given that the governance score is categorical and ordered, the ordinal logistic regression seems appropriate to use as an estimation method.…”