vi national conference “microfinance in russia: building an all-inclusive financial system”...

VI National Conference “Microfinance in Russia: Building an All-Inclusive Financial System” November 2007

INDEPENDENCE – OBJECTIVITY - EXCELLENCE

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Business breakfast with Planet Rating: How to use Rating Assessments for you

Benefit

Presented by: Gema Perez, Senior Analyst, Planet Rating [email protected]

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Planet Rating: The Global Microfinance Rating Agency

Planet Rating has the most extensive global coverage:

Paris HQ: covering Eastern Europe & Asia

Lima Office: covering Latin America & the Caribbean

Dakar Office: covering West & Central Africa

Kampala Office: covering East & Southern Africa

Beirut Office: covering North Africa & Middle East

Most diversified rating team in the industry:

Multicultural: American, Canadian, Colombian, Dutch, French, Lebanese, Senegalese, Spanish, Ugandan, Peruvian, Vietnamese citizens

Multilingual: Arabic, Dutch, Italian, English, French, Lugandan, Spanish, Portuguese, Vietnamese, Wolof speakers

Qualified & experienced team:

Planet Rating’s Managing Director is the only head of rating agencies that has operational microfinance experience; he was former General Manager of SPBD – Samoa’s largest MFI

Each senior analyst has conducted at least 12 rating missions on 3 different continents

Analyst backgrounds: investment banking, management consulting, non-profit, microfinance

Created in 1999 and became a private independent rating firm in June 2005Created in 1999 and became a private independent rating firm in June 2005

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Global Recognition & Global Experience

# 1 microfinance rating agency in Middle East & North Africa

# 1 microfinance rating agency in Africa

# 2 microfinance rating agency in Eastern and Central Europe & NIS

# 2 microfinance rating agency in Latin America and # 1 in Brazil

# 3 microfinance rating agency in Asia-Pacific

In 2007, Planet Rating is ranked…In 2007, Planet Rating is ranked…

… and holds a strong rating experience of various types of microfinance organizations… and holds a strong rating experience of various types of microfinance organizations

Our rating team has developed its expertise through missions within: Mature regulated MFIs, such as Mikrofin (Bosnia Herzegovina) Smaller unregulated MFIs, such as Ugafode (Uganda) Deposit-taking institutions and cooperatives, such as Kafo Jiginew (Mali) Banking institutions, such as Socremo Bank (Mozambique), XacBank (Mongolia),

Banco de Desarollo (Chile) and Ecofuturo (Bolivia)

International organizations and donors have trusted us to evaluate their partner MFIs: USAID in Mali EU/SUFFICE and DFID/FDSU in Uganda Luxemburg cooperation agency in Senegal Islamic Development Bank in Palestine

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Our Rating Experience in Eastern and Central Europe and NIS

Planet Rating is one of the most experienced microfinance rating agencies in the region

Planet Rating is one of the most experienced microfinance rating agencies in the region

We have rated MFIs of all sizes, types, legal statuses and stages of development:

Bosnia and Herzegovina: Mikrofin, EKI, Partner, Sunrise, LOK micro, MI BOSPO, Benefit, Prizma

Russia: FFECCC, RWMN, VRFSBS

Armenia: Aregak, MDF Kamurj

Mongolia: Khan Bank, Xac Bank

Moldova: MicroInvest

Serbia: AgroInvest

Georgia: Constanta

Kosovo: KEP

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Why to perform a rating?

Obtain debt funding

Understand how my institution is doing compared to others

Count on a self-evaluation tool

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Do Russian MFIs need a rating?

High interest rates: 39% nominal portfolio yield Vs. 30.5% CECA; although real portfolio yield is 23% for both, due to higher Russian inflation rates

Total expense ratio of 34,4% Vs. 24,1% CECA

Idem operating costs, but much higher financial expenses (15,1% Vs. 6,3% CECA)

Much lower productivity: 36 borrowers per staff member Vs. 80 CECA

Competitive disadvantages of Russian MFIsCompetitive disadvantages of Russian MFIs

But also, positive competitive advantagesBut also, positive competitive advantages

Highest saving mobilization capacity.

Reaching the poorest populations: Average Loan Balance per Borrower/GNI per Capita of 50,9% Vs. 73,1% in ECA.

Deepening the Russian financial sector is in the interest of many foreign investors.

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Yes, they do and funds need you

There is a huge universe of investment funds in microfinance

There are more than a billion USD available on the market

Investment funds are only using half of their budgets on average

Investment funds need an institutional rating and an social rating

Would you be the next investment?Would you be the next investment?

“The rating debunks the myth of too many suitors chasing the same girlfriend”

“The rating debunks the myth of too many suitors chasing the same girlfriend”

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… more myths to debunk about ratings…

“A rating is too costly»

“Doing a rating takes a lot of time”

« A rating might be too subjective»

“A low grade closes the doors of funding”

“Rating end with the final grade”

How to take the most of the rating experience?How to take the most of the rating experience?

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A rating is an investment

A rating saves investors part of the due diligence process, which allows them to decrease interest rates.

Knowing the risk they are bearing, investors do not have to charge additional spreads to account for the incertitude.

For instance, on a loan of 500,000 EUR a spread of 5% in the interest rate represents a total saving of twice the cost of a rating.

“A rating is too costly” “A rating is too costly”

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Prepare in advance

Interviews

HQ: management team, accountants

Two to three branches: loan officers, branch managers, clients

Board of directors’ members

Auditor, regulators, financial partners, competitors

Information verification

Financial & operational data

Administrative manuals and documents

Legal documents

Preparation of documents

On-site mission

Debriefing session

1 month 3 to 7 business days 4 weeks for institutional rating

2 weeks for mini-rating

MFI comments

Draft report

Final report

Rating

Committee

Report

dissemination

“A rating takes a lot of time”“A rating takes a lot of time”

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A rigorous approach to evaluation

Analysts conduct participatory on-site missions of 3 to 7 business days or more depending on the context

All evaluations are based on the proven CGAP-accredited GIRAFE methodology

Analysts provide a comprehensive debriefing session at the end of the on-site missions

All reports are made investor-friendly

Analysts can discuss the report with investors, donors and/or regulators upon request

The grade is assigned by an independent Rating Committee that includes external members

“A rating might be too subjective” “A rating might be too subjective”

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Know how you will be rated

There are funds willing to take on more risk at a higher price. To get a good grade and reduce the price, it is important to be familiar with best

practice standards. Know what is usually needed to obtain a good grade. Choose a transparent methodology and feel ready for the process.

Rating Domains Weight

Governance 20%

Information 12%

Risk management 12%

Activities 25%

Funding and liquidity 7%

Efficiency and profitability 24%

HighlightsHighlights“A low grade closes the doors of funding"“A low grade closes the doors of funding"

Qualitative domains

Quantitative domains


Governance 20%

Information 12%

Risk management 12%

Activities 25%




Governance 20%

Information 12%

Risk management 12%

Activities 25%





Governance 20%

Information 12%

Risk management 12%

Activities 25%



Qualitative domains



Governance 20%

Information 12%

Risk management 12%

Activities 25%



Qualitative domains



Governance 20%

Information 12%

Risk management 12%

Activities 25%



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GIRAFE Rating Domains

Governance and Decision Making 20%The evaluation of governance is used to analyze the effectiveness of the “ownership” structure, the relevance of the MFI’s strategy, and the coherence between the strategic vision and operations. We also assess the skills of the management team and the entire staff, including an evaluation of the human resource management system. To evaluate this critical area, we interview members of the Board of Directors and management as well as review statues and meeting minutes for all governing bodies. Meetings with other local actors regarding the regulatory environment and the state of the local microfinance sector are included in this analysis. 4 rating factors: Decision making; Planning; Management team; Human Resource management

Information and Systems 12%Adequate information is critical to the success of any organization. MFIs typically have two key information systems: an accounting system and a loan/savings tracking system. In this area we evaluate the availability and accuracy of information as well as system security and appropriateness. We analyze the information flow to asses the quality of the information and perform a mini-audit of the portfolio. We complement our analysis by interviewing the external auditor regarding the methods used and the findings. 3 rating factors: MIS and equipment; Information on activities; Accounting information and financial analysis

GIRAFE is a comprehensive rating methodologyGIRAFE is a comprehensive rating methodology

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Risks 12%In this area we evaluate the quality of risk management within the MFI to determine whether the directors, internal auditor, and all other key personnel have adequately identified the risks related to their work. Furthermore, we assess whether there are controls in place to cover these risks. We review the internal procedures, the internal audit process, and the overall approach to risk management via interviews with staff, the IA and field visits. 2 rating factors: Procedures and internal controls; Internal audit

Activities 25%MFIs disburse loans and potentially mobilize savings. We evaluate the quality of the management of these services as well as the health of the loan portfolio. This analysis includes a review of credit procedures as well as the application of those procedures in the field via client file reviews and interviews with loan officers and clients. 4 rating factors: Portfolio management; Portfolio at risk (PAR); Write-off ratio; Credit risk coverage


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Financing and Liquidity 7%

This area includes an analysis of an MFI’s capital structure, financing strategy, and the appropriateness of the asset liability management given its risk exposure (interest rate, currency, and maturity). Special attention is placed on liquidity management, including the security of cash, the management of short-term investments and cash flow projections. 2 rating factors: Funding strategy; Liquidity management

Efficiency and Profitability 24% The analysis determines whether the MFI is sustainable in the long term without subsidies. An evaluation of this area is necessary whether or not the MFI seeks to be profitable, as an MFI’s efficiency determines its capacity for outreach and the quality of its services. Standard adjustments are performed to account for various types of subsidies and hidden costs. 4 rating factors: Productivity; ROA before adjustments; Operating expense ratio; Financial self-sufficiency


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GIRAFE Rating System

Rating CommitteeFollowing the evaluation mission in the field, the institutions that provided sufficient information will be rated using the system described below. The rating is assigned by an independent committee composed of both Planet Rating analysts and independent parties who have no relationship, material or otherwise, with the microfinance institutions being rated.

Two tiered rating systemThe rating system has two levels. It includes 6 rating areas which are scored on a range from “e” (lowest) to “a” (highest). The scores of each area are weighted and combined to calculate the global rating.

A+, A, A-

Excellent: The institution excels in the evaluation area and is a model for the sector. There is a long-term vision for continual improvement. There are no risks in the short and medium term for operations. Long-term risks are well monitored.

B+, B, B-

Good: Procedures are well developed, effective, and incorporate a long-term perspective. Medium-term and long-term risks exist but are identified by the institution. Some improvements could be made to efficiency and risk management.

C+, C, C-

Minimum required: Procedures are functional but with certain failings. There are risks in the medium term for operations.

D Insufficient: Procedures are in place, but with failings, and certain problems are only partially addressed. There are medium-term, and possibly short-term risks for operations.

E Immediate risk of default or very insufficient: There are immediate or underlying risks for operations or an unacceptable under performance.

Trend The Rating Committee rates an MFI based on current performance and assigns a trend evaluation based on the future prospects as positive, stable, or negative. An uncertain trend will be assigned if there are sufficient uncertainties regarding performance over the next year.


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GIRAFE Rating System

TrendThe Rating Committee rates an MFI based on current performance and assigns a trend evaluation based on the future prospects as positive, stable, or negative. An uncertain trend will be assigned if there are sufficient uncertainties regarding performance over the next year.

Circle graphThe scores for the 6 factors are represented in a circle graph, as illustrated below. The grey area represents the maximum score and the dark red area represents the factor scores for the MFI. The darker the graph, the stronger the MFI’s performance.

Reading a ratingThe first page of our reports provides the rating results at a glance on different levels.


Circle graph

GIRAFE Rating: - Grade- Trend - Date

Description of the institution

Rating highlights

Outlook

Performance indicators

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The rating service includes the added value of public dissemination: Our reports are distributed to all 85 microfinance funds and to numerous donors

such as development banks and bilateral agencies We can call specific investors to discuss the details of a rating if requested by the

MFI

The benefits of public dissemination are enormous: being invisible to the eyes of investors, does not get you far anyways.

If there is not an obligation to make the report public, the MFI has the choice not to publish.

Maximize the benefits of the rating

“The rating ends with the final grade”“The rating ends with the final grade”

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1. What Investors said about our rating methodology:

“Thanks a lot… It has been a great learning experience [about your rating methodology]…” Marcelle Ayo, Senior Risk Analyst, Citigroup Microfinance Group, London, Dec. 2006

“Planet Rating has developed recognized skills in the rating of microfinance institutions…” Abderrahman El Slaoui, Senior Projects Officer, Islamic Development Bank, Jeddah, Nov. 2006

“I want to thank you very much for your training that was highly appreciated by our team.” Jean-Philippe de Schrevel, CEO & Co-Founder, Blue Orchard Finance, Geneva, Oct. 2006

2. What Investors said about our rating reports:

“We appreciate the quality and professionalism of Planet Rating's work and, whenever available, we take into account the findings and conclusions of your rating reports as part of our investment decisions.” Guillermo Salcedo, Manager Microfinance, Oikocredit, Holland, Oct. 2006

“…of course your ratings are highly useful, and we have PR ratings for a good 15 of the investments.” Hugh Sinclair, Senior Consultant, Triple Jump Fund, Holland, Sept. 2006

“I really want to congratulate you and your team…The ratings are great, and they have improved a lot during the years.” Johanna Posada, Manager, Unitus Investment Fund, USA, Jul. 2006

Selected Investors’ Testimonies & Comments

Planet Rating is a well-known rating agency for microfinance investorsPlanet Rating is a well-known rating agency for microfinance investors

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What MFIs said about our work:

“I would like to express our thanks for your valuable work rendered to our company as the Planet Rating expert. But, above all, we thank you for your attitude and expertise.” Igor Gudumac, Marketing & Fundraising Dept., MicroInvest, Moldova, Dec. 2006

“Thanks. It was a very good exercise for us and I am sure we will want you to come back and do it again next year.” J. Peter Morrow, CEO, Khan Bank, Mongolia, Nov. 2006

“Thank you and your team for your work to provide us with this useful report and an upgrade in our rating. I look forward to doing business with you in the future.” Chuluun Ganhuyag CEO, XacBank, Mongolia, Jun. 2006

“We thank you for your openness and professionalism during the rating process.” Roxana Mercado Rodas, General Director, CRECER, Bolivia, Jun. 2006

“… I have reviewed these reports and I do believe that you have done an excellent job. I will be recommending having Planet Rating do a full rating exercise next year for these MFIs in order to see how much progress has been done…” Nabil Abudiab, Director General, Banks Association of Palestine, Palestinian Territories, Apr. 2006

“In our opinion the report is objective, realistic and we do not have any substantial remarks (this was expected since the Planet Rating is a company preparing the reports in an extremely professional manner).” Mira Nenadic, Program Director, Benefit, Bosnia Herzegovina, Dec. 2005

Selected Clients’ Testimonies & Comments

Planet Rating has numerous satisfied clientsPlanet Rating has numerous satisfied clients

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Talk to other institutions

Some of Planet Rating’s clientsSome of Planet Rating’s clients

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Planet Rating’s commitment to microfinance institutions: Increase investment in MFIs with comprehensive analysis Place MFIs on the global stage through high profile ratings Control any potential conflict of interest Increase transparency while protecting non-public information

Planet Rating’s commitment to investors: Maintain trademark quality and consistency in rating reports Enhance positioning as the global microfinance rating agency Innovate with credit and social ratings Provide critical post-rating and customized services

This presentation was prepared exclusively for the benefit and internal use of the Planet Rating SAS client to whom it is directly addressed and delivered in order to assist the client in evaluating, on a preliminary basis, the feasibility of a rating and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by Planet Rating SAS. Neither this presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of Planet Rating SAS.

Planet Rating SAS’ policies prohibit employees from offering, directly or indirectly, a favorable rating or specific rating target, or offering to change a rating or rating target, to a client as consideration or inducement for the receipt of business or for compensation. Planet Rating SAS also prohibits its rating analysts from being compensated for involvement in technical assistance or financing transactions under any circumstances.

Planet Rating SAS and the GIRAFE are the exclusive marketing names/brands of Planet Rating SAS and its subsidiaries worldwide. Planet Rating SAS is the sole legal owner and user of the GIRAFE rating methodology on commercial basis.

We Strive For Excellence

Planet Rating

13 rue Dieumegard

93400 Saint-Ouen Paris

France

Tel: +33 1 49 21 26 30

Fax: +33 1 49 21 26 27

[email protected]

SAS (Société par Actions Simplifiée)with authorized capital of 580,000 EUR. Registration number 483 538 369 RCS Bobigny

vi national conference “microfinance in russia: building an all-inclusive financial system”...

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