Microfinance Institutions: Rating Methodology

This paper studies credit rating methodologies of MFIs, and examines how they are different from methodologies of conventional financial institutions.

The paper traces the evolution of microfinance and MFIs, and identifies emerging models in the sector. It gives an overview of the microfinance sector in Pakistan, and lists key rating factors in the credit rating framework developed by JCR-VIS. These include:

• Access to donor assistance;
• Management’s capability to determine risks for products and mitigate them through product design;
• Presence of delinquency management policies;
• Ability to access deposits;
• Financial sustainability and management’s approach to profitability;
• Management’s commitment to organization’s vision and objectives;
• Legal structure, leadership and human resource management;
• Participation of board of directors in affairs of MFI;
• Effectiveness of management information system;
• Quality and adequacy of internal and external audits;
• Presence of effective regulatory environment.

The paper states that presence of an impact assessment system that estimates and evaluates the MFI’s contribution to society is a positive influence on ratings.