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CAPITAL MARKETS

Microfinance institution deals: The rating game

With a relatively low credit risk, what holds institutional investors back from investing in microfinance institution deals? “If it’s not rated, that closes 90% of the doors,” says Lisa Sherk at BlueOrchard.

By Zach Fuchs

Beyond philanthropy

MFIs obtain ratings either to lower their cost of funds, or to tap a broader pool of investors. That’s why the likes of Standard & Poor’s, Moody’s and Fitch have only just begun to look at MFIs and their bonds. Some blue-chip MFIs like BancoSol and Acleda Bank have obtained ratings from mainstream agencies; most, though, are evaluated by local raters or specialized rating agencies with more modest fee structures that smaller MFIs can afford. Unsecured loans are still perceived to be a dodgy business, and the big rating agencies want to avoid the reputational risk.

MicroRate was one of the first to enter the niche in 1996. “No one had dreamt of rating an MFI,” says Sebastian von Stauffenberg, a managing director at MicroRate. “It’s important that we see that donor and philanthropy money is only going to take this so far,” he says. “In order to take microfinance to the capital markets, you need to give people the transparency that they’re used to.”

Across the microfinance sector, default rates on the underlying loans are less than 2%, while the MFIs themselves default around 5% of the time.

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