MIV Rating
METHODOLOGY
MFR – All rights reserved 2/14
MIV Rating Methodology
Table of Contents
i. MFR – Company Profile and Experience ........................................................................................ 3
ii. MFR MIV Rating: definition and scope ............................................................................................ 4
iii. MIV Rating Framework ............................................................................................................................. 4
iv. MIV Rating : methodology ....................................................................................................................... 5
v. Benchmark Analysis .................................................................................................................................... 9
vi. MIV Rating : process ................................................................................................................................... 10
vii. MFR MIV Rating: output .......................................................................................................................... 11
viii. Alignment to the international assessment standards ...................................................... 12
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MIV Rating Methodology
i. MFR – Company Profile and Experience
MicroFinanza Rating (MFR) is a global rating agency specialized in responsible inclusive finance. Created in 2000 as a dedicated department of Microfinanza Srl, MFR was spun off as an independent Limited Liability Company in 2006.
Headquartered in Italy, MFR operates through a network of 5 regional offices (Ecuador, Mexico, Kenya, Kyrgyz Republic and the Philippines) and 2 country offices (Bolivia and Peru) across 4 continents, boasting the largest global geographical coverage among specialized rating agencies.
MFR leverages on a well-founded credibility. MFR was the first specialized rating agency to be licensed by a Supervisory Authority to carry out mandatory ratings (2007, in Ecuador) and it is currently the only one to be licenced in 2 countries (since 2014, also in Bolivia). Over the years, MFR has been accredited by 2 global rating funds (RF I) and initiatives (Rating Initiative), and a number of regional funds (e.g. Latin America RF II, Moroccan APP) and initiatives (e.g. European Jasmine Initiative, EASI).
MFR is licensed by To conduct Ecuador local central bank/ Regulator (SBS& SEPS)
Credit Rating of regulated financial institutions (FSPs)
Bolivia local central bank/ Regulator (ASFI)
Credit Rating, Social Rating and Issue Rating of regulated FSPs specialized in microfinance
MFR is registered with As Philippines local central bank/Regulator
Microfinance Institutions Rating Agency (MIRA)
MFR is accredited by To conduct Smart Campaign Client Protection Certification of FSPs GSMA Mobile Money Certification Truelift Truelift Assessment of FSPs IPA PPI Certification of any institution using the PPI* Cerise SPI4 and SPI4 Alinus audits
*currently discontinued
Its credibility and technical expertise are further proven by the relations and partnerships established with some of the leading private social investors and fund managers (e.g. responsAbility, OikoCredit, Blue Orchard, Incofin, Triple Jump, Symbiotics, Triodos etc.), DFIs (e.g. KfW, EBRD, EIB, IFC/WB, IFAD, FMO, IADB, UNDP/UNCDF, USAid, OPIC, AfD, CDC Group, etc.), and specialized hedging funds (e.g. TCX, MFX).
As of December 2017, MFR has conducted more than 2,016 assignments in 106 countries worldwide.
Our mission is to provide the responsible inclusive finance industry with independent, high quality ratings and information services, aiming at enhancing transparency, facilitating
investments and promoting best practices worldwide.
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MIV Rating Methodology
MFR MIV Rating is the methodology adopted by MicroFinanza Rating to carry out the assessment of microfinance investment vehicles (MIVs). The definition of MIVs includes Fixed Income Funds, Equity Funds, Mixed Funds, Public Placement Funds, Private Placement Funds, Cooperative and NGOs, Collateralized Debt Obligations (CDOs).
▪ Quantitative and qualitative analysis of the risk profile, financial and social performance ▪ External and independent evaluation ▪ Applies international standards ▪ Compares with other MIVs (use of available benchmarks) MFR MIV Rating can be used internally by the MIV management as well as by external stakeholders such as investors & investees.
Applying its MIV Rating methodology, MicroFinanza Rating focuses its analysis on three main levels which have significant interrelations, namely RISK POSITION, PERFORMANCE and SOCIAL VALUE. 1. Risk: MicroFinanza Rating focuses on both quantitative indicators and on the qualitative capacity
of the MFI to manage the risks. 2. Performance: assessed through trend analysis over a period of 3 years. 3. Social value: social performance management, responsible investment and social results are
essential to assess the MIV efforts in achieving the mission. Social accountability and transparency distinguish social MIVs and reinforce their reputation.
iii. MIV Rating Framework
iv. PLUS: methodology
▪ To provide an independent assessment of the risk &
performance ▪ To compare to benchmarks
ii. MFR MIV Rating: definition and scope
MIV management
Prospective Investors & Investees
The MIV Rating provides an opinion on the MIV’s capacity to manage impact funds, on the achieved performance and social value.
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MIV Rating Methodology
iv. MIV Rating : methodology
MFR undertakes a dynamic analysis grounded on the last three full business years (as opposed, for example, to one single period of the PIIF reporting). MFR MIV Rating methodology places a strong focus on the capacity and reliability of the Asset Manager.
It may be worth mentioning that MFR’s analysis reckons the different financial instruments used for the investment operations (particularly, equity or debt investment). MFR’s methodology also takes into account microfinance and non-microfinance segments of investment.
Multiple funds: as objectives, policies and data reporting may differ across the different funds managed, the analysis will detail differences between the funds where appropriate.
The following dimensions are analyzed in terms of performance and risk assessment, resulting in a balanced mix of qualitative and quantitative factors:
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MIV Rating Methodology
Legend ✓ Core indicators, analyzed at MIV level only Core indicators, analyzed at investees level with data from the MIV and from MFR’s ratings (see infra,
Benchmark Analysis). PIIF validation * Benchmark available
Dimension Sub-dimension
✓ Institutional experience and track record ✓ Business franchise and corporate reputation ✓ Financial standing of the asset manager ✓ Reliability of the service providers ✓ Adequacy & effectiveness of the corporate structure & governance ✓ Conflict of interests management Governance practices directly applied to investees (equity) Good governance promoted among investees (capacity building)
✓ Quality of the management team & investment committee✓ Professional experience and track record of the fund manager✓ Key person & succession and staffing
Dimension Sub-dimension
✓ Targeted investor base✓ Investors concentration (concentration of subscriptions)✓ Ability to retain or develop the investor base ✓ Subscription & redemption mechanisms (terms of the vehicle)
✓ Nature of the fund & liquidity management✓ Leverage
Dimension Sub-dimension
✓ Mission & investment objectives✓ Consistency & adequacy of the investment approach✓ Consistent target returns & projections✓ Compliance with PPM & covenants
✓ Authorized financial instruments (equity, debt, guarantees, etc.)
✓ Eligible & targeted investees (tier & charter)✓ Exit strategy approach (equity)
✓ Portfolio structure (expected & actual):▪ Concentration in single exposures
* ▪ concentration by region & country
▪ concentration by segment (MF & others)
▪ concentration by currency
✓ Country risk & regulatory risk✓ Hedging strategy
* ✓ Average Maturity of Debt Investments (gaps) & unhedged positions
* Credit risk of the investees
* Risk management of investees, including % MFIs by rating grade and by risk management score
1.1 Shareholding & governance
3.1 Investment approach
3.2 Risk management
3. INVESTMENT STRATEGY & RISK
MANAGEMENT
KEY FACTORS/INDICATORS
1.2 Management
KEY FACTORS/INDICATORS
KEY FACTORS/INDICATORS
MFR's ultimate objective in this dimension is to assess the soundness of the governance & management
structure (focus is on the Asset Management Company), able to ensure endurance & viability of the business.
2. FUNDING & DISTRIBUTION
1. GOVERNANCE & MANAGEMENT
2.1 Distribution
2.2 Funding
MFR aims at assessing the distribution strategy, implied risk exposure & the stability of the funding structure of
the MIV.
MFR's objective is to give an opinion on the consistency & adequacy of the investment approach of the Fund,
compliance with investors' expectations and soundness of its rik management approach in relation to the
investment strategy. MFR also gives an opinion on the portfolio quality of the underlying investees.
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MIV Rating Methodology
The following dimensions (6, 7, and 7) focus on the responsible investment and social performance of the MIV and can be added as a module to the assessment.
Dimension Sub-dimension
✓ Sourcing and screening✓ Due diligence process, credit analysis✓ Investment decision-making & credit approval✓ Investment risk monitoring systems✓ Early warning system & crisis management
✓ MIS, IT & reporting✓ Back-office systems & administration✓ Controls ✓ Investment administration (reporting)
Dimension Sub-dimension
* ✓ ROE & yields: trends & stress test
* ✓ Growth of net asset value (NAV) per share
✓ Net Yield on Direct Debt Microfinance Portfolio
* ✓ TER (Operating Expenses / Total Assets)
✓ Management fees
* ✓ Average Investment Size
* ✓ Adequacy of provisioning
* ✓ Write-offs
5.4 Growth ✓ Net subscritions
KEY FACTORS/INDICATORS
KEY FACTORS/INDICATORS
4. OPERATIONS
4.1 Portfolio management
4.2 Systems
5.3 Quality
MFR aims at assessing the adequacy & soundness of front- and back-office operations at the Asset Manager
level.
MFR aims at giving an overview on the performance of the Fund under a profitability, efficiency and quality
point of view. 3-year trends are analyzed. Relevant benchmarks are used where available.
5.1 Returns
5.2 Efficiency5. FUND PERFORMANCE
Dimension Sub-dimension
Investors alignment to the mission, clarity of the mission
Social goals and social risk limits
Monitoring system of the MIV and investees social performance
SPM capacity building provided to the investees
* SPM performance of investees, including % MFIs by social rating grade and by SPM score
ESG and other responsible investment policies Social aspects integrated in the screening, due-diligence, investment
decision making and monitoring Approach to ESG covenants HR strategy to implement social performance management
6.1 Social mission, objectives and monitoring
6.2 Social implementation systems
6. SOCIAL PERFORMANCE MANAGEMENT
MFR aims at giving an opinion on the MIV capacity to manage its social performance through clear and
shared social goals, monitoring system and investment and HR policies in place to implement the social
KEY FACTORS/INDICATORS
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MIV Rating Methodology
Dimension Sub-dimension Endorsement of the Client Protection Principles (CPP) Integration of client protection into investment policies, due diligence
processes and financing or shareholder agreements Appropriateness of the currency and tenor of financing provided Support of a diversified funding base among investees Over-indebteddness prevention for investees and end-clients
Transparency and fairness of the terms and conditions negotiated Client protection promotion and capacity building for investees
* Client protection performance of investees, including % MFIs by client protection score from social ratings, CPP endorsement, MFTranparency effective interest rate.
Balance between social and financial risk-adjusted long term returns, recognizing clients, investees and investors interests
Consideration in decision making of the investees’ social performance,
financial returns, executives remuneration, growth rates and pricing to the final clients
Social and financial balance in staff incentive schemes Responsible approach to exit strategy (equity)
✓ Coordination with other MIVs to manage distressed investees
Transparency promoted with investees (e.g. MIX, ratings) and adopted with investors (e.g. reporting on social performance and client protection progress)
Participation to responsible investment sector initiatives
Dimension Sub-dimension
✓Investees: # partner MFIs, % investees by size and charter type, % fair trade organizations, % production cooperatives
* # end-clients reached; % clients by region, and by HDI of Countries
* % female clients, % female headed client households; % female clients with control over the loan; % investee female staff, management and BoD members
* % rural clients, % clients in the poorest provinces of the Country
* % clients by sector, % clients without access to basic services
* % end-clients under national poverty line (versus national rate)
Promotion of investees products answering to clients’ needs
Promotion of investees innovations for disadvantaged clients
Promotion of investees channels for remote and vulnerable areas
Product development capacity building provided to investees
* Appropriateness of the investees' services to clients’ needs, including %
MFIs offering saving, insurance or non financial services, % MFIs by service quality score from social ratings, % clients perceiving a good quality, client drop-out rate
Evidence of positive change in clients lives from PPI results and impact assessments, including change in poverty levels
* % clients who used the loan for income-generation; # jobs supported; % clients with start-up businesses; % clients who used the loan for education, health or housing
* % clients who used savings for education, health or housing
* % clients who first accessed formal finance thanks to the MFI
* % end-clients who stopped borrowing from moneylenders
MFR aims at giving an opinion on the MIV progress towards the achievement of its mission goals in terms of
outreach to vulnerable people, meeting their needs and contributing to a positive change in their lives.
8.3 Positive chance in clients lives
8. SOCIAL RESULTS
7. RESPONSIBLE INVESTMENT
7.2 Balanced returns
8.1 Outreach the disadvantaged
8.2 Services meeting clients’
needs
7.1 Client protection
7.3 Contribution to a responsible sector
MFR aims at giving an opinion on the MIV responsible investment, reviewing the cleint protection practices
promoted, the balanced returns approach and the contribution to responsible practices in the sector
KEY FACTORS/INDICATORS
KEY FACTORS/INDICATORS
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MIV Rating Methodology
v. Benchmark Analysis
MIV level benchmark
The rated MIV main characteristics and performances are compared within the most appropriate peer group among: Fixed Income Funds, Mixed Funds, Equity Fund).
The source of information for the benchmarking analysis is the Syminvest Annual Benchmarking (www.syminvest.com).
The benchmarking analysis will be conducted on the three main dimensions:
FINANCIAL STRUCTURE
▪ Total Assets (value) ▪ %, value Microfinance portfolio Geo
concentration of investments ▪ Average size of direct investments ▪ Average maturity of direct
investments
FINANCIAL PERFORMANCE
▪ Annual TA growth ▪ LLP ratio ▪ write-off ratio ▪ NAV growth per share ▪ coupon payment ▪ Total Expense Ratio ▪ ROE
SOCIAL PERFORMANCE
▪ Number of MFIs attended ▪ Number of end-clients attended ▪ % by size of MFIs investee (Tier 2,
Tier 3) ▪ Average loan size of MFIs to active
borrowers (USD) ▪ Rural active clients as a % of total
active clients ▪ Women active borrowers as a % of
total active borrowers ▪ % of MFIs’ portfolio in
microenterprise loans ▪ % of MFIs’ portfolio in loans for
immediate household needs ▪ % of MFIs in the MIV direct portfolio
offering savings products ▪ % of MFIs in the MIV direct portfolio
offering insurance products ▪ % of MFIs in the MIV direct portfolio
offering other financial services ▪ % of MFIs in the MIV direct portfolio
offering non-financial services
Investees level benchmark
The main characteristics and performances of the MIV investees are compared/benchmarked within the universe of MFIs rated by MFR.
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MIV Rating Methodology
vi. MIV Rating : process
*MFR’s final report review are sealed by the Rating Committee Unit (RCU). Four senior members (two are MFR top managers) constitute the RCU and are in charge of supervising the rating process, while ensuring high quality standards to the deliverables. **Not including FSP’s feedback
Confidentiality MFR commits itself to treat all the information received from the MIV as confidential. The information shall only be used for the rating purpose and shall not be shared with third parties.
Preliminary Phase
Onsite Visit
Draft Report and Quality Control
• Data collection and desk analysis
• The MIV fills in and send MFR's preliminary forms
• Interviews with fund managers & staff • Assessment of the due diligence process
2 weeks
• Reporting and quality control
4-5 days
3 weeks
Feedback
• Draft report is sent to the MIV for feedback
5 weeks**
1 week Final Report
• Draft report and MIV's feedback discussed at RCU*level • Finalization of the report
1 week
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MIV Rating Methodology
Rating report: The rating process results in an independent third-party evaluation report. The report is structured as follows:
▪ Profile: main features on the management company & fund, classification, regional breakdown, main financial features;
▪ Detailed analysis of the 8 rating areas and related opinion; ▪ Synthetic opinion on the 3 dimensions of the analysis: RISK, PERFORMANCE, SOCIAL VALUE; ▪ Benchmarking: MIV and investees level; ▪ Annexes: definitions & ratios; alignment to international standards.
Modularity clause: the areas of analysis are structured to provide an opinion on the complete financial and social performance and risk of the MIV. However, following the client preferences, the following modules can be isolated in stand-alone reports: ▪ Investees level analysis; ▪ Social performance; ▪ PIIF assessment.
Synthetic opinion: MFR indicates strengths and weaknesses as well as provides a synthetic classification per each of the three dimensions of analysis: risk, performance and social values. The synthetic classifications used are: Excellent, Good, Adequate, Fair, Poor.
Classification Definition
Excellent Excellent capacity, policies and systems to manage microfinance/impact investment funds and related risks. Ability to achieve high performance
compared to relevant benchmarks
Good Good capacity, policies and systems to manage microfinance/impact
investment funds and related risks. Ability to achieve good performance compared to relevant benchmarks
Adequate Adequate capacity, policies and systems to manage microfinance/impact
investment funds and related risks. Ability to achieve performance at least in line with relevant benchmarks
Fair Fair capacity, policies and systems to manage microfinance/impact
investment funds and related risks. Ability to achieve performance not fully in line with relevant benchmarks
Poor
Poor capacity, policies and systems to manage microfinance/impact investment funds and related risks. At this time, the inadequate management processes prevent the achievement of consistent
performance compared to relevant benchmarks
.
vii. MFR MIV Rating: output
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MIV Rating Methodology
The rating structure includes, but it is not limited to, several international standards. The methodology “speaks the same language” of the main assessment and reporting standards used in the industry, by integrating indicators aligned to:
1. CGAP MIV disclosure guidelines
CGAP disclosure guideline Rating area of analysis
Authorized Financial Instrument 2.2 Portfolio structure and risk
Geographical Focus 2.2 Portfolio structure and risk
Eligible partners 1.3 Portfolio management
Hedging strategy 3.2 Liabilities and ALM
Term of the vehicle 3.1 Equity
Target investors 3.1 Equity
Redemption Gates 3.1 Equity
Levels of seniority 3.2 Liabilities and ALM
Types of return 4.1 Returns
Indicators Rating area of analysis TER = Operating Expenses / Total Assets 4.3 Efficiency
Net subscriptions = Total subscriptions during the year – Total redemptions during the year
2.1 Size and growth
Direct Microfinance Portfolio (debt, equity, guarantees)
2.1 Size and growth
Indirect Microfinance Portfolio (debt, equity)
2.1 Size and growth
Average (equity) Investment Size by Microfinance Service Provider (direct)
4.3 Efficiency
Average Maturity of Debt Investments (Guarantee)
3.2 Liabilities and ALM
Direct (unhedged) Debt Microfinance Portfolio in Local (accounting) Currency
3.2 Liabilities and ALM
Net Yield on Direct Debt Microfinance Portfolio
4.2 Portfolio yield
Largest country exposure in the MIV’s microfinance portfolio (and top 5 countries)
2.2 Portfolio structure and risk
Largest microfinance investment exposure of the MIV (top 5)
2.2 Portfolio structure and risk
Largest microfinance investment unhedged currency exposure of the MIV
3.2 Liabilities and ALM
Loan loss provisions 2.3 Asset quality
Write-offs 2.3 Asset quality
Leverage = Total liabilities / Total Equity 3.2 Liabilities and ALM
Largest Subscription (top 5, 10) 3.1 Equity
Management fees, others 4.3 Efficiency
Operating expenses 4.3 Efficiency
Yearly return 4.1 Returns
viii. Alignment to the international assessment standards
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MIV Rating Methodology
2. PIIF1 reporting framework of the (the PIIF framework has taken a number of indicators from
the MIV disclosure guidelines of the CGAP); please find below the table showing which areas of social performance analysis cover the PIIF principles.
PIIF indicator Rating area of analysis
Overarching approach 5 Social performance management
Inclusive finance, PIIF indicator 1, range of services
7.2 Services meeting clients’ needs
Inclusive finance, PIIF indicator 2, client protection
6.1 Client protection
Inclusive finance, PIIF indicator 3, fair treatment
6.1 Client protection
Inclusive finance, PIIF indicator 4, responsible investment
1.1 Shareholding & governance, 5.2 Social implementation systems
Inclusive finance, PIIF indicator 5, transparency
6.1 Client protection
Inclusive finance, PIIF indicator 6, balanced returns
6.2 Balanced returns
Inclusive finance, PIIF indicator 7, standards
6.3 Contribution to a responsible sector
3. Client protection principles (6.1 Client protection)
4. MFTransparency (6.1 Client protection)
1 A methodology for the assessment of the indicators reported under the PIIF framework is not available yet; however, several social
aspects of the methodology proposed by MicroFinanza Rating are directly linked with the PIIF reporting framework.
MFR Head Office Via R. Rigola 7, 20159 Milan, Italy
Tel. +39 02 3656 5019 [email protected] www.mf-rating.com
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