Microfinance review

microfinance review

Micro-finance institutions (MFIs) face a distinct challenge when trying to encourage prospective donors and financial markets to back their activities. Although evaluations and assessments are available to MFIs from credible agencies, these tend to be expensive, and lack a common standard that can be applied to the entire industry. Most of the evaluations have not been made public, leaving the methodology and/or results unknown to other potentially interested parties. What is required is a credit rating system that takes into account the nuances of the field, and sends a clear signal to donors and investors of their sustainability. This section discusses the elements that are required for the operation of a effective credit rating standard, and also identifies the best practices related to MFIs.

Ratings, common performance standards, and benchmarking in the Micro-finance industry, will become increasingly important. First, performance standards contribute to raising the quality and efficiency of MFIs and provide confidence and security for private investors. Second, in competitive environments where there is pressure to commercialise microfinance, regulators view ratings and standards as a way to separate 'mediocre' from 'star' performing institutions. Third, donors are interested in setting performance standards to provide clear benchmarks and guidelines to determine future funding for MFIs. In this context, performance standards can be useful in promoting independent and transparent review of MFIs which should enhance prospects for the growth and capacities of MFIs.

There are two basic approaches that the MPA may take to promote the creation of an industry wide credit rating standard. The first is to take up the function of a credit rating agency itself, establishing a methodology and assembling a team of professionals experienced in the ratings and performance measurement industry. The second option is for the MPA to establish a rating and assessment fund, providing partial financing of rating and assessment services by reputable agencies with experience in the field. Both options would aim for transparent results,

fully open to public scrutiny. They also would be structured to considerably lower the costs for MFIs willing to undergo such a rating assessment.

Any successful attempt to promote a transparent, industry-wide credit rating standard would need to focus on a number of crucial elements. The task of the MPA is to decide how to "flesh out" these elements, and provide a suitable methodology that will prove attractive to MFIs and financial backers alike. Either these elements can be set down as the rules used for an in-house credit rating system within the MPA, or as the criteria MFIs and rating agencies need to meet to be eligible to draw from an MPA assessment fund.

A common understanding on the reporting, measurement, and evaluation of MFI performance has not been reached - no surprise given the diversity of the providers. Efforts in place to develop rating and certification systems include:

  1. PEARLS rating system. This is a rating system developed for credit unions by the World Council of Credit Unions (WOCCU). The rating system includes a certification process called Finance Organization Achieving Certified Credit Union Standards (FOCCUS).
  2. ACCION Camel. The evaluation guideline for MFIs developed by ACCION International.
  3. Girafe rating system. Developed by PlaNetFinance.
  4. MicroRate. Developed by Damian von Stauffenberg of MicroRate.
  5. MicroBanking Bulletin/ MicroBanking Standards Project. Funded by the Consultative Group to Assist the Poorest (CGAP).
  6. The Philippine Coalition for Micro-finance Standards. Developed a set of performance standards to serve as guidelines or benchmarks to assess the operations of Philippine NGOs involved in Micro-finance.
  7. CGAP Microfinace Rating and Assessment Fund
  8. Institutional Performance Standards and Plans Developed by the Committee of Donor Agencies for Small Enterprise Development and Donor's Working Group on Financial Sector Development, United Nations Capital Development Fund.
Source: Options for a New Micro-finance Promotion Agency - draft document Hari Srinivas - hsrinivas@gdrc.org

Source: www.gdrc.org

Category: Payday loans

Similar articles: