Microfinance Networks: Ratings Uplift Potential for Member Institutions
This paper analyzes the impact of membership in a microfinance network (MFN) on an MFI’s Issuer Default Ratings (IDR). The IDR is an indicator of relative creditworthiness.
The paper examines challenges facing MFNs and MFIs since the onset of the financial and economic crisis in 2008. MFNs are generally willing to support their member MFIs, but their ability to provide financial support is limited by their donor-based origins, internal competition for funds and regulatory constraints. According to FitchRating, the presence of operational links between an MFN and its member MFIs, and the impact of MFN membership on governance and risk management can strengthen the MFI’s standalone position, leading to a higher IDR.
FitchRating considers top-down and bottom-up factors in its analysis of member MFIs. It incorporates business and legal considerations regarding the relationship between the MFN and MFIs. The factors used to determine the impact of an MFN on a member MFI’s institutional framework include:
- Institutional profile;
- Ability of MFN to provide emergency liquidity;
- MFN’s support to MFI seeking third-party funding;
- Equity capital and ownership structure;
- Track record of extensive financial support to MFIs.
