Do Microfinance Rating Assessments Make Sense? An Analysis of the Drivers of the MFI Ratings
This study presents a comprehensive multivariate analysis of the relation between MFI ratings and MFI size, profitability, efficiency, risk, social performance, and solvency.
High ratings for several financial instruments in the recent global financial crisis turned out to be inaccurate. The paper states that similar lessons can be found in the microfinance industry. MFI rating assessments claim to measure a combination of creditworthiness, trustworthiness and excellence in microfinance. The study uses a global dataset covering reports from 324 MFIs. Findings suggest that:
- Main drivers of MFI ratings are size, profitability and risk;
- Ratings do not capture the double bottom-line objective of MFIs;
- Statistical relationships between microfinance ratings and MFI social objectives are absent;
- Association between operational efficiency and microfinance ratings appears weak;
- Efficiency seems to be totally unrelated to MFI ratings for all agencies but one.
Although the study finds some minor differences between rating agencies, overall results suggest that microfinance ratings convey information very similar to that communicated by traditional credit ratings.
