Morgan Stanley's Approach to Assessing Credit Risks in the Microfinance Industry

The growing investor interest in microfinance combined with the strong demand from microfinance institutions (MFIs) for capital market solutions, have set the stage for the financial industry and rating agencies to understand how to accurately assess the risks of microfinance institutions.

Drawing from various industry leaders and its own experience, Morgan Stanley’s Microfinance Institutions Group has created a comprehensive internal credit analysis and rating methodology to assess and compare risks within the growing microfinance sector as well as relative to other sectors through a global (foreign and local currency) scale rating.

This approach addresses the specific challenges inherent in microfinance while drawing upon the work of major pioneers in microfinance rating and incorporating insights made available by industry players. The analysis has identified seven important “rating factors” that are important to consider when assessing the credit risk of these institutions:

• Loan portfolio;
• Profitability, sustainability, and operational efficiency;
• Management and strategy;
• Systems and reporting;
• Operating procedures and internal controls;
• Asset-liability management;
• Growth potential.