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Comprehensive Evaluation and Financing Strategies for Microfinance Institutions (MFIs)

This document provides an extensive overview of the evaluation, due diligence, and financing mechanisms essential for microfinance institutions (MFIs). It covers recent developments in specialized ratings, due diligence methods across three distinct tiers, and key questions to assess the financial health of MFIs. Additionally, it outlines investor types, intermediaries, and various funding mechanisms that contribute to the sustainability and growth of MFIs. Essential references and resources, including international rating agencies and sector publications, are also included to guide stakeholders.

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Comprehensive Evaluation and Financing Strategies for Microfinance Institutions (MFIs)

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  1. Financing MF Securitization Evaluation Investors and intermediaries Recent updates

  2. Publications Portfolio Review Tool (Robert Christen, CGAP) Evolution of Specialized Rating for MFIs (Todd Farrington, IADB) Websites Websites & publications of featured organizations NextBillion.org DevelopmentGateway.com Resources

  3. Evaluation: Overview • 1. Documentation and reports (eg financial statements) • 2. Due Diligence (on-site) • 3. Rating (credit and/or fiduciary) • 4. Regulation clearance and forex hedging mechanisms are set up

  4. Evaluation: Due Diligence Purpose • To ensure that reported financial condition reflects true health of the MFI • Questions answered: • Does the portfolio, as it is reported by the financial institution, reflect its true value? • Have adequate provisions been made for possible losses? • Do management and staff have the proper skills to originate, monitor, and collect loans? Characteristics • On-site • Different degrees of scrutiny Example: CGAP’s 3-tier system

  5. Evaluation: Due Diligence • Tier 1: General study • User: donor agency considering making a small donation • 2-day field review, at head office • Qualitative assessment of credit policies and general documentation

  6. Evaluation: Due Diligence • Tier 2: Moderate study • User: Donor considering a sizeable grant or investment • 2-5 day field review, at branches • Qualitative assessment of credit policies, procedures and practices, and verification of management information system reports

  7. Evaluation: Due Diligence • Tier 3: Most rigorous study • User: Equity investors and regulators • 2-4 week field review; of branches and individual loans • Evaluate, measure and quantify asset quality through statistical sampling and detailed analysis

  8. Evaluation: Due Diligence • Stages of evaluation are progressive:

  9. Evaluation: Due Diligence

  10. Evaluation: Due Diligence

  11. Evaluation: Due Diligence • In each Tier, “penalty cards” are issued when results show that reported conditions are different from actual or optimal circumstances • Yellow card: significantly different • Recommendation: more investigation needed • Red card: egregiously different • Recommendation: Critical problem area; necessary to factor into final investment decision • Penalty card example: Go to Appendix A, B

  12. Evaluation: Ratings • 6 major rating agencies • Planet Rating • Microfinanza • CRISIL • S&P • M-CRIL • MicroRate

  13. Evaluation: Ratings • Planet Rating (1999) • Locations: HQ in Paris, with regional offices in Lima (Peru), Dakar (Senegal), Kampala (Uganda) • Methodology: • GIRAFE • Scale: A+ to E (11 grades)

  14. Evaluation: Ratings More details: Refer to Handout 1 (Planet Rating Corporate Presentation)

  15. Evaluation: Ratings More details: Refer to Handout 1 (Planet Rating Corporate Presentation)

  16. Evaluation: Ratings • Microfinanza (2001) • Locations: HQ in Italy; regional office in Quito (Ecuador), others planned • Methodology • 2 main categories: • fiduciary risk (governance and mgmt; trustworthiness) • credit risk (ability to repay obligations) • Scale: AAA to D (10 grades)

  17. Evaluation: Ratings

  18. Evaluation: Ratings

  19. Evaluation: Information Gateways Rating Fund (2001) • Overview: • What: partially sponsors rating assessments • Who: IADB ($877,000), CGAP ($1,800,000), EU (€ 1,850,000 ) • Explore online: ratingfund.org • Comparison of rating agencies (see App C) • Rating reports (completed under Rating Fund since 2001) • Co-financing table (80/60/40%)

  20. Evaluation: Information Gateways MIX Market (2002) • Overview: • What: microfinance information platform; link MFIs worldwide with Investors and Donors • Who: CGAP, Citigroup Foundation, the Open Society Institute, the Rockdale Foundation, other pte foundations • Explore online: mixmarket.org • MFIs • Funds • Partners • Environment • My MIX Market

  21. Fund B Investors & Intermediaries Investors: • Funds • Fund of Fund (“Fund B”)

  22. Investors & Intermediaries Funds • General institutional funds, eg pension funds Fund of Fund (or mixed) • MicroVest • Oikocredit • Gray Ghost • Omidyar Network* • Citigroup • Deutsche Bank Microcredit Development Fund

  23. Investors & Intermediaries MicroVest • 2 Products • MicroVest I, LP (fund of fund) • Instruments: debt, loan guarantees, equity (with an exit strategy), and quasi-equity sub-debt • Target: gross portfolio yield of 10% -11% • $22,570,000 (Sept 06) • mPower (fund) • Choose your return: for 1 and 3-year notes, returns are 0%-2%; for 5, 7, and 10-year notes, returns are 0%-3%; principle is reinvested and returned with interest at maturity • Partner: Calvert Foundation

  24. Investors & Intermediaries Oikocredit (1976) • Locations: The Netherlands (HQ); 12 regional offices; 16 country offices • Types of capital instrument • Debt (EUR50k-2m), equity, credit lines • Hard local currency, flexible interest rates; longer term loan (5-10 years) • EUR163m o/s; disbursed EUR71.6m in 2005 • Note: Oikocredit does not specialize in MF funding

  25. Investors & Intermediaries Financial Intermediaries • Developing World Markets • BlueOrchard • iShares • Emerging Markets

  26. Investors & Intermediaries Developing World Markets (1994) • World’s first socially-oriented investment bank • Has raised ~$250m for MF • June 2006: • Launched MFS-XXEB, the first cross-border securitization of loans to microfinance institutions • Mix of debt and equity tranches in USD, EUR, GBP • Senior notes rated A1 by MicroRate, making it the world’s first MF CDO to be rated • Sept 2006: Advised ProCredit in TIAA-CREF’s* $43m equity investment

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