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

9

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.