Rating in Microfinance: Cross-Country Evidence

This paper examines microfinance rating agencies' ability to impose market discipline on MFIs and their managers by rating the organizations performance. It develops a new database of about 130 MFIs operating in 62 countries, and analyzes their performance during the period from 1998 to 2002. Research reveals that rating agencies differ greatly in their impact on MFI performance and ability to raise funds. Findings include:

• Microfinance rating may help impose market discipline as it affects MFIs outreach and sustainability, and their ability to raise funds;
• Subsidized rating may not be appropriate;
• Having a rating positively affects outreach, but not necessarily sustainability;
• Some MFIs may slack off and show worse financial results after receiving a good rating from a particular rater. 

Microfinance raters are converging toward an overall numerical or letter grade system. It is important to study how well each raters system is able to correctly predict risk and affect MFIs ability to raise funds. Further studies on microfinance rating need to use these newly introduced numerical and letter grades to identify rating methodologies that are most effective in imposing market discipline.