Microfinance Institution (MFI) Rating Tool

This document describes some of the critical aspects of a rating tool for microfinance institutions (MFIs), developed by MICROSOP Foundation, Madurai, India. It outlines the context of development of this instrument which is for annual internal ratings with a specific focus on small MFIs. The paper provides a brief description of the rating process which broadly involves:

• Meetings with the governing body and various levels of the management of the MFI;
• Participatory exercises with clients of the MFI;
• Financial statement analysis;
• Grading report preparation in consultation with the MFI.

The document further provides two of the most prominent tools used for the rating process:

• Strength, Weakness, Opportunity and Threat (SWOT) analysis for the organization;
• MFI rating framework that covers diverse areas such as governance, coverage, business processes, human resources, asset quality and disclosures and profitability and efficiency.

The document also has the output indicators such as rating grades that would be assigned to the MFI at the end of the rating process and recommendations that would be useful for donor or financing agencies based on the grades. It supplements this information by notes to the financial ratio calculations.