S&P: Soaring Investor Interest in Microfinance Drives Need for New Credit Tools,...
New York, United States, June, 19 2007 -
Underscoring the substantial growth in the microfinance industry, Standard & Poor's Ratings Services, the leading provider of financial market intelligence, today announced the release of a special publication, "Microfinance: Taking Root In The Global Capital Markets." This global initiative helps pave the way for microfinance institutions (MFIs) to gain greater access to global capital markets.
The report, part of an intensive collaborative effort of Standard & Poor's analysts and seasoned and knowledgeable experts in the microfinance sector, provides an important framework for mainstream investors to make better informed decisions in microfinance. "The lack of consistent metrics for analyzing MFIs has hindered investment at a time when microfinance is growing at a significant rate," said Cynthia Stone, Managing Director and chair of the Emerging Markets Council, Standard & Poor's. "And despite the level of interest, mainstream investors need standard metrics before they can invest in this particular sector."
The report provides needed recommendations for a rating methodology that can be used globally and consistently to rate MFIs within countries, across borders, and across asset classes. "The main challenge facing the microfinance sector today is how to scale up and facilitate more investment that can translate into more loans for the 1.5 billion people that are financially underserved," said Ms. Stone. "Investors require transparent and globally acceptable standards for credit analysis and performance evaluation of MFIs. New metrics are needed to allow investors to compare microfinance investment opportunities across borders and across asset classes."
The report provides the context for the rating methodology by summarizing the current state of MFI funding, reviewing the key issues in developing MFI rating methodology, and outlining the minimum information recommended for producing a rating. Microfinance provides an important framework for small loans to be offered to individuals with low incomes, typically in developing economies, to enable them to grow their businesses and increase productivity. However, significant global expansion of microfinance requires resources of the mainstream capital markets, including both global and local markets. Unlocking these sources of capital presents several challenges. Mobilizing large sums of capital requires suitable instruments that allow investors to define parameters of risk and reward.
On May 31, Standard & Poor's assigned ratings to the first publicly rated microfinance CDO. Standard & Poor's expects to rate an additional two to three transactions in the months ahead, with issuance levels potentially reaching $500 million by the end of 2007. As the existing microfinance institutions also become adept at handling this new inflow of funding, and more MFIs enter the market, securitization volumes could reach between $1 billion-$3 billion annually over the next decade. "Though MFIs have largely existed on the fringes of the securitization market, greater transparency and globally acceptable standards will further enable institutions to access capital," said Gary Kochubka, a director in Emerging Markets Structured Finance Ratings at Standard & Poor's.
The report is available in two parts on RatingsDirect. "Report Of The Microfinance Rating Methodology Working Group" provides the contextual summary. "MFI Rating Methodology" provides the Working Group's recommendations.
ABOUT THE WORKING GROUP
The Microfinance Rating Methodology Working Group, established by Standard & Poor's earlier this year, brings together the broad experience and expertise required to understand the information needs of mainstream investors, the nature of microfinance institutions, and the state of the microfinance industry in the context of broader financial system issues. The group includes Standard & Poor's analysts and representatives from organizations with long experience in MFI assessments (ACCION International, Consultative Group to Assist the Poor (CGAP), and CRISIL), entities that support microfinance development (CGAP and the Inter-American Development Bank), and the Microfinance Information eXchange (MIX).