The Microfinance Rating Market Outlook The Rating Fund Market Survey 2006

Gail Buyske

The Rating Fund would like to thank ADA (Appui au Dveloppement Autonome), the MIX (Microfinance Information eXchange), and the Rating Agencies who contributed to this report.

Table of Contents List of Acronyms List of Tables and Figures Executive Summary Introduction Microfinance Rating Industry Overview Credit Risk Ratings and Global Risk Assessments Demand Supply Regional Results Conclusion Appendices Appendix 1: Survey Methodology Appendix 2: Mandatory MFI Ratings Appendix 3: Regional Microfinance Rating Markets 5 6 8 10 16 22 26

List of Acronyms ACP BRAC CDO DWM EECA EU IDB IFC IFI LAC MBB MENA MFI MISFA MIX MIV PENSA PKSF SEC SIDBI SPV SRI SSA Africa, Caribbean, and Pacific States Bangladesh Rural Advancement Committee collateralized debt obligation developing world markets Eastern Europe and Central Asia European Union Inter-American Development Bank International Finance Corporation international financial institution Latin America and the Caribbean MicroBanking Bulletin Middle East and North Africa microfinance institution Microfinance Investment Support Facility for Afghanistan Microfinance Information eXchange, Inc. microfinance investment vehicle Program for East Indonesia SME Assistance Palli Karma-Sahayak Foundation Securities and Exchange Commission Small Industries Development Bank of India special purpose vehicle socially responsible investor/investment South and Sub-Saharan Africa

List of Tables and Figures Table 1: Microfinance rating industry overview Table 2: Global risk assessments and credit risk ratings by region, 2006 Table 3: Average MFI rating report prices Table 4: Regional average rating report prices Table 5: Market penetration ratios Table 6: Three largest MFI rating countries by region Figure 1: Regional ratings market trend Figure 2: Global risk assessments and credit risk ratings Figure 3: Market share by region Figure 4: Market share evolution, LAC and Asia

Executive Summary This report provides an overview of the state of the microfinance institutions (MFIs) rating field as of the end of 2006. This evaluation of the demand and supply side dynamics of the field is based on the 2006 Market Survey conducted by the Rating Fund and interviews with market participants. Demand side issues will have the most significant future impact on the field, with MFI rating agencies having demonstrated their ability to respond effectively to demand from investors and MFIs. The most significant impact on demand will come from increased activity of investors. The most likely outcome of more investment is more demand for mainstream credit agency ratings, so that investors can meet their own regulatory requirements and work in an information environment that is familiar to them. This change in demand would affect only the upper end of the market and would not threaten specialized MFI rating agencies, particularly if there are mechanisms for new generations of MFIs to be introduced to the rating field. There are also other growth opportunities for specialized rating agencies (such as social ratings agencies): continued expansion of global risk assessment products and development of credit risk rating products recognized by global capital markets. Two other major demand side issues are (1) the potential growth and impact of required ratings of regulated MFIs (these are now required in four countries) and (2) Basel II, which will encourage borrowers, such as MFIs, to obtain mainstream credit risk ratings to reduce their borrowing costs. The demand and supply side issues discussed here should be seen in the context of the impressive growth of MFIs and the MFI rating field. For example, international investment in MFIs increased from an estimated US$1.7 billion in 2004 to at least US$4.2 billion in 2006; the number of ratings and assessments increased by 23 percent, from 327 to 403. The MFI rating field will inevitably face challenges as the market continues to evolve, but it has the advantage of facing these challenges in a growing market.

Introduction The MFI rating field is in an exciting period of growth and change as rating agencies adapt to the evolving needs of MFIs and investors and as they position themselves for the future. Two facts about the microfinance field reflect the potential growth opportunities for rating agencies: (1) international investment in MFIs increased from US$1.7 billion in 2004 to at least US$4.2 billion in 2006, and (2) MFIs reporting to the Microfinance Information eXchange, Inc., (the MIX) increased their loan portfolios from US$4.3 billion in 2003 to US$7.1 billion in 2005. 1 MFI rating agencies are demonstrating notable flexibility on the supply side of the market, as evidenced by factors such as geographic expansion, ongoing product development, and the formal alliance of two specialized rating firms. Therefore, the issues that will affect the nature and rate of future growth primarily concern demand. Key questions include the following: Will demand become more institutionalized as a result of regulatory requirements? Will there be a shift in the current emphasis on global risk assessments compared to credit risk ratings (global risk assessments account for two-thirds of MFI evaluations)? Will the greater involvement of investors lead to more demand for mainstream credit risk ratings? What will be the impact of the conclusion of the Rating Fund, which has, so far, cofinanced a quarter of the ratings? Demand for credit risk ratings is likely to increase, but this is unlikely to diminish demand for global risk assessments, which fulfill an important diagnostic function. This report is based on the 2006 Market Survey conducted by the Rating Fund and interviews with market participants. 2 It consists of an overview of the MFI rating industry; an explanation of the fields two major productscredit risk ratings and global risk assessmentsand a summary of developments in both product areas; a discussion of the demand side dynamics for MFI ratings and assessments; a discussion of supply side dynamics; a summary of regional developments; and a conclusion. MFI Rating Industry Overview The MFI rating field has been growing at a double digit pace since at least 1997. Expansion continued in 2006, with the total number of ratings and assessments increasing by 23 percent,
These investment data are based on investments by international financial institutions (IFIs) and microfinance investment vehicles (MIVs), which represent the two largest classes of MFI investors. Other types of investments are not included. Elizabeth L. Littlefield, Building Financial Systems for the Poor, MIVs and DFI Investment Examined, Proceedings of the second annual Cracking the Capital Markets Conference, New York, Presentation March 19, 2007. The MFI data are from Blaine Stephens, Commercialization continues apace, MicroBanking Bulletin, Issue 14, Spring 2007. (www.mbb.org) The MIX is an association created to increase transparency and benchmarking; over 1000 MFIs provide information to the MIX regularly. (www.mixmarket.org) 2 The survey methodology and the summary characteristics of the rated MFIs are discussed in Appendix 1.
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from 327 to 403, following growth of 14 percent in 2005 and 27 percent in 2004. 3 (Table 1) Particularly relevant is that 165 MFIs obtained ratings or assessments for the first time, compared with 109 in 2005. This indicates the fields ongoing growth potential. Repeat ratings and assessments also increased, from 218 to 238. Increased demand was largely market driven, with mandatory ratings accounting for only 48 of the ratings in 2006, compared with 44 in 2005. The Rating Fund accounted for slightly less than one-quarter of the total ratings and assessments in both 2005 and 2006. 4 Table 1: Microfinance rating industry overview Total number of ratings and assessments completed First-time ratings or assessments Repeat ratings or assessments Global risk assessments Credit risk ratings Mandatory credit risk ratings Proportion of Rating Fund co-financed ratings 19972006 2005 2006 1,809 327 403 721 109 165 1,088 218 238 1,188 217 275 621 110 128 314 44 48 NA 5 22% 24%

Growth in the number of MFI rating agencies reflects a sense of dynamism similar to that shown by the growth in the number of ratings. The field has grown in 10 years to encompass more than 15 rating agencies, several of which have significant global coverage. One example of the ongoing changes in the field is the formal affiliation of MicroRate and M-CRILnow called MicroRating International (MRI). This period also was marked by the geographic expansion of several MFI rating agencies; increased activity by mainstream credit risk rating agencies; and the emergence of PRIME, a specialized rating agency in Indonesia. Regional rating markets can be readily divided into two groups based on size (i.e., the number of ratings concluded in 2006). 6 The first group includes Latin America and the Caribbean (LAC) (208 ratings) and Asia (111). The second group includes South and SubSaharan Africa (SSA) (30 ratings), Eastern Europe and Central Asia (EECA) (37 ratings), and the Middle East and North Africa (MENA) (17 ratings). The least penetrated rating market appears to be SSA. The number of MFIs from the region that report to the MIX and Microbanking Bulletin (MBB) is in the same range as for LAC and Asia, but the number of ratings is considerably lower.

These figures include multiple ratings of the same MFI in one year. The increase in the Rating Funds share of total ratings was largely driven by an increase of Rating Fund ratings in Latin America and the Caribbean (its largest market) from 36 in 2005 to 60 in 2006. This increase reflected the cumulative result of marketing the Rating Fund program by the Fund and the rating agencies, as well as efforts by MFIs to use the Fund before its closing in 2007. 5 The Rating Fund began operations in 2001. 6 These data include multiple ratings of the same MFI in one year.
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Credit Risk Ratings and Global Risk Assessments

Regional Rating Markets Trend

250 200

LAC
150 100 50 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Asia EECA SSA MENA

Note:No data was reported for Asia in 1997. No data was reported for EECA and SSA in 1997 and 1998. No data was reported for MENA in 1997, 1998, and 1999.

Figure 1: Regional rating markets trend Credit Risk Ratings and Global Risk Assessments The MFI ratings field produces two basic types of rating products: credit risk ratings and global risk assessments. Credit risk ratings focus on the likelihood that an issuer of debtwhether an MFI or some other entitywill be able to meet its debt servicing obligations. Credit risk ratings used on the global capital markets represent a statistical probability of default, based on substantial historical data. Most credit risk ratings of MFIs reflect a higher degree of judgmentnot a statistical probabilitybecause there is not yet sufficient historical data about most MFIs. Mainstream credit risk rating agencies and several locally or regionally based credit agencies, such as CRISIL in India and Class & Asociados and Equilibrium in Peru, produce credit risk ratings for MFIs. Global risk assessments provide a broader assessment of an MFIs operations and its prospects than the exclusively creditworthiness focus of credit risk ratings. The global risk assessment is the first product created by the MFI rating field. It can provide a broad range of diagnostic information about the MFIs management, social mission, products, risk management, growth capacity, etc., in addition to its creditworthiness. Global risk assessments are produced by the four specialized rating agencies with a global outreach (Microfinanza Rating, MicroRate, M-CRIL, and Planet Rating), CRISIL in India, and PRIME in Indonesia. CRISIL and MicroRate are the only organizations to produce both credit and global risk assessments, although several of the specialized rating agencies are developing credit risk products. A comparison of credit risk ratings and global risk assessments shows that credit risk ratings are almost exclusively a LAC product. Asia is the only other region in which credit risk

ratings (3) were produced in 2006. (See Table 2.) LAC also stands out because not only does it have a high number of credit risk ratings (125), but global risk assessments are widely used as well (83). Although the contributing factors are complex, these characteristics may be partly the result of LACs more advanced stage of development in the MFI ratings field. LAC is the first region to adopt MFI ratings, and it is the largest market based on total number of ratings produced. (In 1997, there were 27 ratings and assessments in LAC, followed by 33 in 1998, before the Asian market began to emerge with 22 ratings in 1999. There were 208 ratings in LAC in 2006including multiple ratings of the same MFI in one yearfollowed by 111 in Asia.) An additional factor is that several LAC countries have mandatory credit risk ratings for MFIs that meet certain criteria. Table 2: Global risk assessments and credit risk ratings by region, 2006 Global risk assessments LAC 83 Asia 108 SSA 30 EECA 37 MENA 17 Total 275 Credit risk ratings 7 125 (47 mandatory) 3 (2 mandatory) 0 0 0 128 (47 mandatory)

Figure 2 reflects worldwide use of global risk assessments. Global risk assessments accounted for two-thirds of the evaluations completed in 2006; credit risk ratings accounted for one-third. The difference between the two products is particularly marked when considering first-time assessments and ratings. There were 152 first-time global risk assessments in 2006 and just 12 first-time credit risk ratings. Global risk assessments are often the first external evaluation product used by MFIs, because they are useful as a diagnostic tool. As MFIs grow and their need to access institutional funding increases, they may shift to seeking credit risk ratings or obtaining a credit risk rating as a supplement to a global risk assessment. Some MFIs seek out global risk assessments because they are interested in global visibility and access to international financial institutions (IFIs) and microfinance investment vehicles (MIVs). On the other hand, some MFIs seek credit risk ratings to comply with local regulation and/or financing from local banks.

Mandatory risk ratings include multiple ratings of the same MFI in one year.

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Figure 2: Global risk assessments and credit risk ratings 8

1,400 1,200 Number of Ratings 1,000 800 600 400 200 0 Global risk assessments First-time global risk assessments Repeat global risk assessments Credit risk ratings
217 107 275 152 110 123 128 110 37 2 13 115 108 684 504 621 584 1,188

1997-2006 2005 2006

First-time credit risk ratings

As can be seen in figure 2 credit risk ratings are repeated more frequently than global risk assessments. Two factors contribute to this outcome. First, several countries with mandatory MFI credit risk ratings require that the ratings be done more than once a year. Second, credit risk ratings are designed as a product that requires updating, because creditworthiness varies depending on financial performance. By contrast, global risk assessments are perceived as being relevant for a longer period, because issues, such as management capacity and growth potential, will not necessarily change from one year to the next. Regardless of whether this perception is correct, it contributes to the relatively lower level of repeat global risk assessments. Demand A key question for the MFI rating field going forward is whether it can continue to grow at its current rate by responding toand creatingnew market opportunities. A comparison of the MFI rating field with the mainstream credit risk ratings field provides a useful perspective on demand side dynamics and trends. This comparison is not intended to imply that the MFI rating field will or should evolve to resemble the mainstream credit risk ratings field, but to provide a framework for understanding possible future scenarios. There are four key differences between the fields:

The credit risk rating figures include multiple ratings of the same MFI in one year (except for the firsttime credit risk rating figures).

Repeat credit risk ratings

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Unlike in the mainstream credit ratings field, there is only limited institutionalized demand for MFI ratings and assessments Unlike in the mainstream credit ratings field, there is no demonstrated relationship, as yet, between MFI ratings and assessments and the cost of funding Unlike in the mainstream credit ratings field, it is not standard practice for the debt issuer to pay for the ratings The mainstream credit rating industry does not provide a global risk assessment product

The mainstream credit risk ratings field is demand driven; regularly recurring demand for credit risk ratings is built into the structure of the worlds capital markets. In the United States, for example, the Securities and Exchange Commission uses ratings created by nationally recognized statistical rating organizations to identify investment grade securities that can be purchased by organizations, such as insurance companies and pension funds. The 2004 Basel II Agreement will create an even larger role for mainstream credit rating agencies, because the capital adequacy of banks will be based on the credit ratings these agencies assign to the banks borrowers. A second characteristic of the mainstream credit risk rating market is the close relationship between a borrowers rating and cost of funding. Because credit risk ratings express a statistical probability of default, the process of market arbitrage means all borrowers with the same rating will have similar funding costs. These two factors create significant incentives for investors to demand ratings and for borrowers to provide them. For investors, ratings are a decision-making tool that expands the pool of eligible investments. For borrowers, ratings increase access to funding and provide a road map for how to reduce borrowing costs by improving their ratings. These factors also help to explain the third characteristic of mainstream ratings: the issuer pays the rating agencys fee. Although there is ongoing debate about how to manage the resulting conflict of interest, the simple fact that the practice exists illustrates the value of ratings to issuers. Although none of these characteristics currently applies to MFI ratings, there are important developments in all three areas. The three largest MFI rating markets in the world, based on the number of ratings completed in 2006, are Peru 9 (86), India (70), and Bolivia (60). 10 Each of these markets has some form of required MFI rating. Bolivia has mandatory ratings established by government regulation as part of its overall financial sector regulatory framework. The Indian apex bank, the Small Industries Development Bank of India (SIDBI), requires ratings from all of its MFI partners and accounts for 70 percent of rating demand. It is instructive to contrast the experience of India with that of Bangladesh. Although, Bangladesh has a large MFI market, the apex organization Palli Karma-Sahayak Foundation
9 10

For details on Perus regulation see appendix 2. In the case of Bolivia, 17 MFIs received ratings in 2006; a total of 57 ratings were multiple ratings for the same MFIs. Most of the multiple ratings reflected regulatory requirements that certain MFIs be rated four times a year. In some cases, these MFIs contracted voluntary global risk assessments in addition to the mandatory credit risk ratings.

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(PKSF) does its due diligence internally and does not require ratings. Although there were six assessments in Bangladesh in 2005, none was conducted in 2006. An interesting test case is posed by Afghanistan, where the apex organization Microfinance Investment Support Facility for Afghanistan (MISFA) is in the process of launching an external assessment of the 15 MFIs it funds. If Afghanistan follows the examples of Bolivia and India, the demonstration effect created by these ratings will lead to more demand for ratings by other investors and MFIs. Required ratings are not the only factor explaining the growth of these rating markets. Not only are India and Bolivia large MFI markets with substantial funding from investors, but not all markets with required ratings for regulated MFIs have grown rapidly. Pakistan is an example of a large MFI market with required ratings for MFI banks (all banks in Pakistan must be rated), yet there were only four MFI ratings in 2006. 11 Unlike in Bolivia, required ratings in Pakistanwhere MFIs are largely funded by donors and donor-funded apex organizationshave not led to demand for voluntary ratings. Nevertheless, these three large rating markets underscore the potential role of institutionalized demand in developing the MFI rating field. Particularly relevant for further market development is the impact these required ratings may be having on the rest of the market, bearing in mind the complexity of the cause-and-effect relationship. Nonmandatory ratings increased in Bolivia in 2006, while several commercial banks in India, including ICICI, have begun to follow SIDBIs example and require microfinance ratings. Separate from the issue of mandatory ratings, there was more demand in 2006 for ratings from other investors, with several specialized MFI investors requiring ratings as part of their due diligence process and/or monitoring processes. 12 Although the use of MFI ratings and assessments is far from being institutionalized, this is a significant development for a field that is barely 10 years old. Although MFI rating agencies interviewed for this survey agreed unanimously that ratings facilitated MFI access to funding, these impressions are not conclusive evidence. One specific example of this relationship is in India, where SIDBI established a minimum ratings threshold for its MFI partners. In addition to anecdotal evidence that ratings affect the cost of funding, Peru provides a specific case: the MFIs rating level determines what fee it pays to the deposit guarantee agency. The answer to the question of who pays for an MFI rating varies by country and timing. In several cases, donors, government organizations, and/or microfinance networks initiated rating programs and paid for part or all of the ratings. Examples of organizations other than MFIs that pay or have paid for ratings include the European Union (EU), FSDU, and several other funders in Uganda; SIDBI in India; and the Islamic Development Bank in Palestine. The Rating Fund has played an important role in encouraging MFIs to initiate ratings and to cover part of the costs themselves. Presumably, as more investors require
Microfinance banks in Pakistan that do not collect deposits are not required to provide ratings until they have been operating for three years. There are six microfinance banks in Pakistan, most of which have recently been established. 12 An incomplete list of examples includes responsAbility, Blue Orchard, Oikocredit, Deutsche Bank Foundation, and Grameen Foundation.
11

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ratings and MFIs can see a clear relationship between having a rating and access to fundingas well as potentially the price of fundingMFIs will have an increased incentive to initiate and pay for ratings themselves. Although the lack of global institutionalized demand and a clear ratingprice relationship limits demand for ratings of MFIs compared with credit risk ratings for private capital markets borrowers, a third factor works in the opposite direction by adding a source of demand. As noted, global risk assessments play an important role as a diagnostic tool that is not replicated by credit risk ratings. They are also the preferred evaluation product for MFIs undergoing their first external analysis. Within this overall context for the demand dynamics of the MFI ratings field, there are four importantor potentially importantdevelopments. These concern the consumers of MFI ratings and assessments, transaction structures, regulation, and the Rating Fund. Consumers of ratings and assessments As microfinance has become better known to the international financial community and as MFI rating agencies have increased their capacity, the spectrum of consumers of MFI ratings and assessments has expanded as well. The original consumers of MFI rating products were donors who helped develop the microfinance field and managers and investors seeking guidance for benchmarking and institution building. These consumers have been increasing their use of MFI evaluations, including for the early stages of program design. Examples include the Islamic Development Bank in Palestine, the World Bank in Mali, and the EU in Uganda. National MFI associations, such as those in Haiti and Pakistan, play a key role in encouraging their members to obtain ratings or assessments; the role of apex organizations has already been noted. Private investors have emerged as an increasingly important type of MFI rating consumer. These investors range from purely commercial, profit-seeking investors, to socially responsible investors (SRIs). Not only has investment in MIVs increased by almost US$1.4 billion over two years to reach US$2 billion in 2006, but 30 new MIVs were created over this same periodthere were 74 MIVs as of year end 2006. 13 Although these figures give an impression of the growth of private investment in MFIs, they reflect only the investment being made through MIVs. Total investment in MFIs, including by IFIs and private investors, is even higher. 14 What impact will this new type of investor have on the MFI rating field? Some private investors are beginning to require ratings or assessments as a precondition to investment. The longer term question is whether these investors will require mainstream credit risk ratings for at least their larger investments. These ratings would provide three potential advantages to such investors: they would enable them to comply with any domestic

13 14

Littlefield, Building Financial Systems for the Poor. IFI investment in MFIs totaled US$1.1 billion in 2004 and increased to US$2.2 billion during 2006. Littlefield.

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requirements regarding eligible investments; they would increase the liquidity of investments; and they use rating methodologies that are familiar to private investors. In assessing the impact of such a development, keep in mind that the MFI field has limited capacity to absorb significant flows of new capital. As of year end 2006, 40 MFIs reporting to the MIX reported gross loan portfolios of over US$100 million; 11 others had gross loan portfolios of over US$85 million. 15 Nevertheless, even small amounts of private investment could have a significant impact on the characteristics of the ratings field. Two alternative outcomes, which also apply to transaction structures discussed below, are (1) mainstream and specialized rating agencies could work together to create microfinance credit risk ratings and/or (2) specialized agencies could develop credit risk rating methodologies that would be recognized by private investors. Increased investment by SRIs could raise demand for social rating products. Transaction structures A second and related demand side development concerns the structure of MFI transactions. Borrowers with limited track records and/or those located in countries with low credit risk ratings sometimes enhance their credit risk ratings by borrowing through offshore special purpose vehicles (SPVs) that are created to limit lenders exposure to the risk of the borrower and its country of operations. 16 This structure enables the borrower to raise funds at a higher credit risk rating and lower cost. SPVs can be created for different types of transactions. One type of transaction that has grown increasingly popular is collateralized debt obligations (CDOs), in which a debt issue is divided into different tranches of risk, based on factors such as guarantees and priority of access to cash flow from the underlying pool of borrowers. Minimizing the cost of these types of structured transactions entails maximizing their liquidity. This consideration could increase pressure on borrowers to obtain ratings from mainstream ratings agencies with internationally recognized rating scales.

www.mixmarket.org An MFI, for example, can take a pool of its loans, transfer it to an offshore incorporated SPV, and raise funding against the security of that specific pool of loans.
16

15

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Three Precedent-Setting MFI Ratings In 2006, the Bangladesh Rural Advancement Committee (BRAC) successfully completed the first AAA-rated local currency microcredit securitization ever undertaken by an MFI. This transaction will give BRAC access to US$180 million in local currency funding over six years, thus providing funding at a lower cost and for a longer tenor than has previously been available. The transaction entails the assignment of BRACs loan receivables to a special purpose trust. This trust issues certificates that represent collateral in the underlying receivables to the certificate holders. The certificates are collateralized by loans at a ratio of 150 percent. Partly because of the high level of collateralization and the high credit quality of BRACs borrowers, the transaction was rated AAA (the highest rating) by the Credit Rating Agency of Bangladesh. The first rated microfinance CDO was a US$60 million loan securitization created by Developing World Markets (DWM) that closed in June 2006. It will provide funding for up to five years to approximately 30 MFIs in 15 countries. The CDO has three debt tranches, of which the most senior tranche was rated A1 by MicroRate, using the Moodys credit risk rating scale. (This is the highest Moodys rating.) The first publicly rated microfinance CDO is to be issued by BlueOrchard Finance and was rated by Standard & Poors (S&P) in May 2007. Investors will receive notes collateralized by the microfinance loan portfolios (the underlying loans are not secured) of 21 MFIs located in 13 developing countries. The MFIs will receive five-year funding in a variety of currencies, depending on their needs. The US$108 million transaction has different tranches with different ratings, depending on the structure of the tranche. The preliminary rating for a tranche of US$42 million is AA (the second highest S&P rating).

Regulation A third potential demand side trend concerns regulation. Currently, Bolivia, Ecuador, Peru, and Pakistan require credit risk ratings of MFIs that meet certain criteria, such as those that take deposits. In Nigeria, a global risk assessment is required for microfinance NGOs applying for banking licenses. The criteria applied for determining whether an MFI rating is required, as well as for authorizing MFI rating agencies, are summarized in Appendix 2. Because these requirements reflect each countrys overall financial sector regulationcredit risk ratings are required for banks in these countries as wellthe question of whether other countries will follow this example in the future is more of a financial sector question than a specifically microfinance question. Another regulatory issue is the likelihood that the introduction of Basel II will put pressure on MFIs with significant bank funding to obtain ratings. Because banks will be obliged to allocate more capital to borrowers that do not have credit risk ratings, nonrated MFIs will face higher borrowing costs. 17
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The rating agencies must be authorized by the national financial authorities in each country.

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Rating Fund A fourth factor influencing the demand side of the MFI ratings field is the Rating Fund. This program was initially created by IDB and CGAP in 2001 and was later expanded to include the EU/ACP Microfinance Programme. A total of 356 ratings was co-financed during the life of the Fund24 percent of the total voluntary ratings covered in the Rating Fund survey. 18 The Rating Fund played a critical role in encouraging broader issuance of ratings by subsidizing the cost of ratings, up to three times, with decreasing subsidies. Anecdotal feedback from rating agency interviews indicates that many MFIs are now prepared to pay for ratings with their own resources, but that the growth of first-time ratings for smaller MFIs could decrease now that there is a higher financial hurdle. There are two possible countervailing developments. One is the creation of national organizations, such as those in Indonesia, Uganda, and Azerbaijan, that help to subsidize ratings costs. The other is the momentum the field is creating, as demonstrated by growing private investor demand for ratings and assessments. The Rating Fund, itself, will be evaluated in a separate report. Supply This discussion of the supply side of the MFI rating field addresses suppliers and their rating products. There are three broad categories of MFI ratings suppliers: 1. Specialized MFI rating agencies, with regional or global coverage (Microfinanza Rating, MicroRate, Planet Rating, and M-CRIL all have regional or global coverage, while PRIME covers only Indonesian MFIs) 2. Regionally or single-country based rating agencies that rate a range of financial organizations, such as Class & Asociados in Peru and CRISIL in India 3. Mainstream credit risk rating agencies (Fitch Ratings, Moodys, and S&P) The only rating agencies that currently produce both credit risk ratings and global risk assessments are CRISIL and MicroRate, although a Pakistani credit risk rating agency created by Japan Credit Rating and a local market intelligence group, Vital Information Services, (JCR-VIS) and Microfinanza Rating have partnered on at least one rating. The specialized MFI rating agencies have historically produced only global risk assessments, while the other types of firms have produced credit risk ratings. The three mainstream credit risk rating agencies produced 48 of the 403 ratings and assessments included in the 2006 survey (12 percent); 46 of these were in Bolivia. Figure 3 provides a market share overview by region. It shows considerable market share diversity, with Planet Rating being the only rating agency to hold the number one market position in two regions. Figure 4, which illustrates market share shifts in the two largest markets, LAC and Asia, underscores the competitiveness in the MFI rating field and the
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The Rating Fund co-financed voluntary ratings.

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flexibility of MFI rating agencies in responding to new market opportunities. 19 In LAC, market share rankings have shifted significantly each year, with Fitch Ratings jumping from third position to first in 2006, as it has expanded from mandatory to voluntary ratings. LAC data, which combine credit risk ratings and global risk assessments, also show that MicroRate, which provides global risk assessments, has attained the third largest market share over a three-year period. In Asia, M-CRIL has held on to its first ranking position but has been losing absolute market share, while a new rating agency, PRIME, has grown quickly. PRIMEs rapid emergence, as the result of a project undertaken by the International Finance Corporation (IFC), Program for East Indonesia SME Assistance (PENSA), and Mercy Corps, demonstrates the underpenetrated nature of the Indonesian market. The majority of PRIMEs clients received assessments for the first time. An important test for PRIMEs future will take place in 2007, as it shifts from providing ratings subsidized by its founders to becoming a fully for-profit ratings agency. Another example of developments in the Asian rating market is provided by JCR-VIS. JCR-VIS works with Microfinanza Rating to provide clients a choice of credit risk ratings or global risk assessments. It also has a joint venture with CRISIL in Bangladesh.

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The most significant players in SSA have been Planet Rating and MicroRate, where their 50/50 market share in 2004, based on 7 ratings each, had evolved in favor of Planet Rating by 2006, with 20 ratings and 67 percent market share. The CEE/NIS market has been dominated by Microfinanza Rating, which has had at least 60 percent market share for the past three years, following by Planet Rating. Planet Rating has consistently had the largest market share in MENA.

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Figure 3: Market Share by Region

Asia
PRIME, 23%

Market Share of Top Three Agencies and # of Ratings

25 49 31
M-CRIL, 44%

CRISIL, 28%

SSA

Microfinanza Rating, 3%

Market Share of Top Three Agencies and # of Ratings 1

MicroRate, 30%

20

PlanetRating, 67%

EECA
Planet Rating, 32%

Market Share of Top Three Agencies M-CRIL, 5% and # of Ratings 2

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23
Microfinanza Rating, 62%

19

Market Share of Top Three Agencies MENA and # of Ratings Microfinanza

Rating, 12%

2
MicroRate, 24%

11

Planet Rating, 65%

LAC
Credit Risk Ratings

Market Share of Top Three Agencies and # of Ratings

Equilibrium 28%

33 46

Fitch Ratings 40%

Class y Asociados 32%

37

LAC
Global Risk Assessments
Microfinanza Rating 28%

Market Share of Top Three Agencies and # of Ratings

23 35

MicroRate 42%

Planet Rating 30%

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Figure 4: Market share evolution, LAC and Asia

LAC Market Share Evolution Top Three Rating Agencies

25% 20% 15% 10% 5% 0% Fitch Ratings Class y Asociados Equilibrium MicroRate
Ratings 2004: 32 (Fitch Ratings) / 33 (Class y Asociados) / 30 (Equilibrium) 2005: 32 (Fitch Ratings) / 33 (Class y Asociados) / 39 (Equilibrium) 2006: 46 (Fitch Ratings) / 37 (Class y Asociados) / 35 (MicroRate)
22% 18% 22% 23% 19% 18% 21% 23% 17%

2004 2005 2006

Asia Market Share Evolution Top Three Rating Agencies

80% 60% 40% 20% 0% M-CRIL CRISIL PRIME
Ratings 2004: 65 (M-CRIL) / 20 (CRISIL) / N/A (PRIME) 2005: 72 (M-CRIL) / 23 (CRISIL) / 7 (PRIME) 2006: 49 (M-CRIL) / 31 (CRISIL) / 25 (PRIME)

2004 2005 2006

76%

69% 44% 24% 22% 28% 7% 23%

Changes are occurring in product offerings as well. In 2006, the Rating Fund introduced mini-assessments for MFIs that are too young and/or too small for full-scale credit risk ratings or global risk assessments. The first eight mini-assessments were completed in

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Uganda in 2006. 20 Mini-assessments are intended to serve as a stepping stone that will lead to full-scale assessments. Although none of the MFI rating agencies interviewed for this survey anticipates that mini-assessments will become a major part of its business, miniassessments may help replace the Rating Funds role in encouraging new generations of MFIs to issue ratings. Two new potential product directions underscore the point made earlier that the MFI ratings field will not necessarily evolve into a subset of the mainstream credit risk ratings field. One product being considered is a rating specifically designed to address an organizations social mission. Although clearly relevant to MFIs, it could also have a broader application. Another possible product is a rating of self-help groups (SHGs) active in India. 21 Work is also underway to fine tune existing rating products. An important question on this agenda is how to address sovereign risk. Again comparing mainstream and MFI rating agencies, mainstream credit agencies have global rating scales that explicitly incorporate sovereign risk. 22 These ratings are comparable globally. A company in India with a BB rating from S&P represents the same risk of default as a company with a BB rating from S&P in the United States. Specialized MFI rating agencies historically have not incorporated sovereign risk into their evaluations. This has arguably not been necessary for global risk assessments, because they are not exclusively focused on creditworthiness issues that could be affected by sovereign risk issues. Therefore, some specialized MFI rating agencies have global scales that do not incorporate sovereign risk, while others have scales that are not comparable between countries. Historically, sovereign risk has not been an issue for most users of MFI ratings, for whom the primary value was the in-depth analysis of the MFI itself. This situation is shifting, both as private investors become more interested in microfinance and need a more globally consistent rating scale that incorporates sovereign risk and as rating agencies themselves expand their geographic presence and need to ensure ratings consistency. 23 An S&P Working Group created to develop an MFI rating methodology may provide an impetus for further developments. S&P has declared its intention to develop its own rating criteria for MFIs. 24

MFIs with assets of US$200,000 to US$1 million were eligible for mini-assessments subsidized by the Rating Fund. 21 The Reserve Bank of India defines an SHG as a registered or unregistered group of micro entrepreneurs having homogeneous social and economic background voluntarily coming together to save small amounts regularly, to mutually agree to contribute to a common fund and to meet their emergency needs on mutual help basis. As of March 2002, the National Bank for Agriculture and Rural Development, Indias apex bank for rural development, provided banking services to 461,478 SHGs, covering 7.8 million families. This is only a portion of the total number of SHGs in India. http://www.rbi.org.in/scripts/FAQView.aspx?Id=7. 22 There are also specific national scales for some countries. 23 The inherent complexity of creating such a scale is exacerbated by the fact that many countries with extensive MFI activity have relatively low country risk ratings. Applying the basic principle that the credit risk rating of a financial institution will always be somewhat constrained by the creditworthiness of the country in which it operates, the result is that the ratings of the MFIs operating in a low-rated country will be compressed. 24 Standard & Poors, Microfinance: Taking Root in the Global Capital Markets, June 2007.

20

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A related consideration is that each MFI rating agency has its own scale, and there is no clear mapping between scales. Therefore an investor trying to evaluate the Indian MFI market, for an example, cannot readily compare the ratings reports of the agencies operating in that market. (By contrast, there is a generally accepted view in the capital markets about how the ratings of mainstream credit rating agencies correlate, despite some differences in the underlying methodologies.) Although there has been some discussion among specialized rating agencies about the need to formally map their ratings scales, to date, there has not been sufficient incentive to do so. This lack of incentive may reflect a strategy by some agencies to gain sufficient market share so that their scale dominates. A final issue on the supply side concerns the cost of MFI ratings. Although the average rating cost globally did not change significantly between 2005 and 2006, the cost differentiation between the regions is noteworthy, with LAC and Asia demonstrating the lowest average ratings costs. This partially reflects the higher competition in those regions, which has led rating agencies both to lower costs and to devise ways to maintain their margins by expanding their on-the-ground presence. Another factor influencing the Asian results is the high volume and low cost structure in India. (See tables 3 and 4.) Table 3: Average MFI rating report prices 25 2005 2006 Global risk assessment US$10,777 US$10,810 Credit risk rating US$9,876 US$9,734 Average US$10,716 US$10,729 Table 4: Regional average rating report prices, 2006 Region Average cost LAC US$9,777 Asia US$8,846 SSA US$12,470 EECA US$13,158 MENA US$12,942 Regional Results Although 10 years of rapid growth might be expected to have exhausted the MFI rating markets potential, there still appears to be scope for expansion. Table 5 compares the number of MFIs that have had at least one rating or assessment completed between 1997 and 2006 with two estimates of the total number of MFIs per region. The more conservative estimate, in the first column, is the number of MFIs that reports to MIX Market and MBB. The high-end estimate in the second column includes all types of MFIs, including credit cooperatives. The actual potential MFI rating market is somewhere between these two sets of figures, although presumably closer to the MIX and MBB figures, which capture a large proportion of MFIs with the desire and ability to maximize their transparency.
25

Based on survey data.

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Both data sets show that LAC and Asia are the largest markets in terms of the estimated number of MFIs. They are also the largest in terms of total MFI assets. Both markets are close to saturation in terms of MFI ratings, according to MIX/MBB data; however, there is considerable room for growth according to the less conservative data set. Even if the conservative data are used, however, the figure for the number of rated MFIs is based on the number of MFIs that have had at least one rating since 1997. Even if the number of MFIs eligible for ratings does not increase, which seems highly unlikely, the market can still grow as MFIs are rated regularly. An interesting outcome of these comparisons concerns SSA, in which the number of MIX/MBB MFIs (243) is comparable to those for LAC (244) and Asia (299). In contrast to LAC and Asia, however, the SSA market has demonstrated the lowest interest in MFI ratings. This is reflected in the low 36.6 percent market penetration (according to the more conservative data). Some of the factors contributing to this outcome include the relatively small overall size of the SSA market (US$3.16 billion in total MFI assets); slower development of commercial interest in this market compared to LAC and Asia; a relatively high number of investors that do their own due diligence; and a number of larger MFIs in west Africa are cooperatives that have not actively sought external funding. Ratings in SSA also have been relatively expensive compared those in LAC and Asia (Table 8). However, this should change as more specialized agencies open offices in SSA. 26 The combination of gradually increasing investor interest in SSA MFIs and greater on-the-ground marketing and rating capacity is expected to result in increased market penetration. There have been several local donor projects stimulating ratings and assessments by co-funding or subsidizing them (e.g., in Uganda and Mali). 27 It will be instructive to see whether these subsidized ratings create momentum and are followed by ratings requested by the same and other MFIs without or with less donor funding. Although the EECA region has similar penetration as that of the SSA region according to the conservative calculation (32.6 percent), the EECA market has shown more rapid growth since 2002 and is seen as having considerable potential. The fact that average MFI size is relatively large (total MFI assets are US$6.39 billion) creates a larger likelihood that more MFIs will be interested in ratings. MFIs in the EECA region also have demonstrated a commitment to transparency; nine of the 20 winners of 2006 CGAP Transparency Awards were from the EECA region. Finally, because of the low estimated number of MFIs in MENA35 according to the more conservative dataand the low total MFI assets figure (US$661.7 million), the potential for significant growth in MENA appears to be relatively low.

Planet Rating opened an office in Senegal in 2005 and in Uganda in 2006. Microfinanza Rating will be opening an office in Kenya in 2007. MicroRate has had an office in Johannesburg for several years. 27 Uganda provides an example of how this situation could change in the future. Ugandan MFIs have been the biggest issuer of ratings since 1999, with seven of the 26 ratings having been issued in 2006. The increase in 2006 was largely because of an initiative by the local rating fund to finance mini-assessments. Mali also showed significant growth in 2006, registering nine ratings in 2006, compared with three ratings in the previous seven years. These ratings were financed by USAID and the World Bank.

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Table 5: Market penetration ratios Estimated number of MFIs, based on MFIs reporting to MIX Market and MBB a LAC 244 Asia 299 SSA 243 EECA 187 MENA 35 Total 1,008
a b

Estimated number of MFIs, including credit cooperativesb

Total MFI assets, based on MIX Market and MBB data,c in US$ billions 12.49 8.37 3.16 6.39 661.7 31.1

MFIs rated at least once, 1997 2006 230 315 89 61 26 721

Market penetration ratio, based on MIX/ MBB data (%)

Market penetration, including credit cooperatives (%)

2000 1800 1050 180 73 5,103

94.3 105.3 36.6 32.6 74.3 71.5

10.4 6.2 2.9 20.6 23.3 14.1

MIX, June 2007. Based on all MFIs reporting to MIX Market and MBB. CGAP, Financial Institutions with a Double Bottom Line: Implications for the Future of Microfinance, Occasional Paper No. 8, July 2004. c The MFI assets figure is based on 948 MFIs. It is based on the number of MFIs that report total asset information; the total number of MFIs (1008) is based on the number of MFIs that report borrower information. Adrian Gonzalez, MIX research analyst, compiled this information.

A more detailed discussion of the key characteristics and developments in each region is provided in Appendix 3. Table 6 provides an overview of the three largest countries by ratings in each region.

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Table 6: Three largest MFI rating countries, by region Region/country LAC Peru Bolivia Nicaragua Asiaa India Indonesia Bangladesh SSAb Uganda Benin Mali MENAc Morocco Palestine Egypt EECA 28 Bosnia and Hercegovina Russia Albania
a

Number of ratings, 2005 175 86 37 9 103 72 8 6 24 3 3 1 6 4 0 0 19 7 1 0

Number of ratings, 2006 208 86 60 12 111 70 27 0 30 7 2 9 17 7 8 0 37 4 8 2

Total number of Number of MFIs ratings, 1997 rated at least once, 2006 19972006 1014 230 415 297 64 523 315 398 43 25 137 89 26 20 12 39 26 21 8 4 96 61 20 15 8

First ratings were in 1998. First ratings were in 1999. c First ratings were in 2000.
b

28

First ratings were in 1999.

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Conclusion The future development of the MFI rating field will depend significantly on the demand side of the business. It appears that the most significant impact on demand for MFI ratings will come from the increased activity of private investors representing the entire spectrum of purely for-profit investors and SRIs. Because MFIs have limited absorption capacity, relatively little private investment can have a significant impact on MFIs and potentially the rating market. The most likely outcome of more private investment is more demand for mainstream credit agency ratings. This would allow private investors to meet their own regulatory requirements and work in a familiar information environment. Such a change in demand would affect only the very upper end of the MFI market and would not threaten specialized MFI rating agencies, particularly if there are mechanisms for new generations of MFIs to be introduced to the rating field. An alternative outcome would be closer cooperation between specialized and mainstream rating agencies to develop MFI credit risk ratings or, for some specialized agencies, to develop credit risk ratings recognized by private investors. The fact that specialized rating agencies produce an important noncredit risk rating productglobal risk assessmentsprovides further growth potential unrelated to the activities of mainstream credit risk rating agencies. The Outlook Survey and interviews confirm the value of these assessments. Not only are they the first external evaluation product typically used by MFIs, but some MFIs that need credit risk ratings also use global risk assessments. The global risk assessment methodology lends itself to the development of assessments with an exclusive focus on social performance, which is a potential future growth area for MFI rating agencies. A final demand side issue concerns the potential growth and impact of required ratings, whether mandatory, as in Ecuador, or the result of a policy action by a key national player, such as SIDBI in India. Basel II is likely to result in more demand for MFI ratings from commercial banks that fund MFIs. This will reduce the capital charge for banks and lower the cost of funding for MFIs. This report highlighted the flexibility and dynamism MFI rating agencies have demonstrated on the supply side of the field, as illustrated by their geographic expansion, the involvement of new rating agencies, continued product development, and a formal affiliation between two specialized firms. The future may bring other types of affiliation or consolidation as well, as the result of intensifying consolidation and the conclusion of the Rating Fund. Although adapting to a changing market is a significant challenge, growth and increasing competition are characteristics of a successful market.

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Appendix 1: Survey Methodology The data analyzed in this survey encompass an estimated 9095 percent of the rating agencies that evaluate MFIs and are based on information provided by the four globally active specialized rating agencies (M-CRIL, Microfinanza Rating, MicroRate, and Planet Rating); seven regional rating agencies (Apoyo y Asociados, Class y Asociados, CRISIL, Equilibrium, JCR-VIS, PRIME, and PCR Holding); and two mainstream rating agencies (Fitch Ratings and S&P). 29 The data include all the ratings partially financed by the Rating Fund (356 in total, of which 98 in 2006) as well as 1,453 ratings financed independently of the Fund (305 of which were completed in 2006). Generally, the more recent independently financed ratings were of larger MFIs; the maximum asset size for Rating Fund eligibility as of January 2006 was US$30 million. (Previously there was no size limit.) The maximum average loan size was US$2000, with exceptions considered. Every MFI rating is counted as one rating, including in countries such as Ecuador and Bolivia, where MFIs meeting certain criteria must be rated more than once a year.

BRC, Ecuability, Feller Rate, and Moodys participated in the 2005 survey but not the 2006 survey. The 2006 data for Ecuability and Moodys were added to the 2006 survey from other sources.

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Appendix 2: Mandatory MFI Ratingsa

Country Number of mandatory ratings, 2005 survey 32b Number of mandatory ratings, 2006 survey 32 Criteria for mandatory rating Any MFI that wants to be regulated by the superintendent of banks must be rated by an authorized rating agency. Criteria for rating agency Rating agencies are authorized by the securities authority (but can be vetoed by central bank). International rating agencies must have a relationship (ownership or alliance) with an NRSRO.c Authorized by securities authority and registered with central bank. Authorized by securities commission (CONASEV) and registered at SBS. Rating agencies are required to be registered at CONASEV. Issues

Bolivia

Ratings scale is same as for banks. Rating is disclosed on securities authority Web site.

Ecuador

Perue

14f

14

Pakistang

Nigeriah

Credit cooperatives with total assets over US$10 million must be rated by an authorized rating agency.d Commercial banks, financing companies, and insurance companies must be rated. The rating of an MFI is optional. In some cases, the Superintendence of Banks, Insurances and AFPs has required MFIs to be rated. For example, MFIs must be rated if operating a branch in the capital or when asking for approval on nonauthorized operations. All microfinance banks must be rated within three years of grant of license or within one year of commencement of deposit mobilization, whichever is earlier. An NGO-MFI seeking to transform into a microfinance bank is required to provide an Institutional Assessment by a rating agency with

Ratings scale is same as for banks. Rating disclosed on agency Web site. Deposit-taking financial institutions must have a credit risk rating. Rating scale same as for banks. Rating disclosed on Web site of securities authority and rating agency. Ratings need to be disclosed on the CONASEV Web site and on the rating agencys Web site. Ratings also required for commercial banks.

Rating agency must be on the panel of the State Bank of Pakistan (SBP) or be an international microfinance rating agency with prior approval from SBP. Not applicable

Banks wishing to manage Nigerias external reserves must meet minimum required ratings by two of the three mainstream credit

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specialization in micro risk rating. financing. agenciesi a Unless otherwise noted, information for Bolivia, Ecuador, and Peru is from Enrique Diaz Ortega, MFI rating: Some Latin American experiences in a regulated environment, III Rating Forum, Quito, Ecuador, September 12-13, 2006. b Each mandatory rating is produced four times per year. c Author correspondence with Enrique Diaz Ortega, microfinance consultant. d Author correspondence with Massimo Vita, Microfinanza Rating. e Informative profile, MFI regulation and supervision in Peru, http://www.microfinancegateway.org/resource_centers/reg_sup/micro_reg/country/36/ f Each mandatory rating is produced two times per year. g Credit risk rating of Microfinance Banks, Prudential Regulation 29 for Microfinance Banks, State Bank of Pakistan, BSD Circular No. 10 of 2003, http://www.sbp.org/pk/bsd/2003/C10.htm h Regulatory and Supervisory Framework for Microfinance Banks (MFBs) in Nigeria, http://www.cenbank.org/OUT/PUBLICATIONS/GUIDELINES/DFD/2006/REGULATORY%20GUIDELIN ES.PDF i Recent Developments in Nigerias financial system, IFLR1000 Country Reports, http://www.iflr1000.com/default.asp?page=38&CH=3&sIndex=2&CountryID=95

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Appendix 3: Regional Microfinance Rating Markets Latin America and the Caribbean (LAC) The LAC market remained the largest MFI rating market in 2006, having increased by 33 ratings to a total of 208 ratings. Bolivia accounted for most of the growth. Bolivia is the regions second largest market, where the number of ratings jumped from 37 in 2005 to 60 in 2006. Because of the multiple ratings required for regulated MFIs, these figures represent ratings for 14 MFIs. The primary impetus for the growth in Bolivia was the expansion of Fitch Ratings into providing ratings for unregulated MFIs; previously its work consisted of mandatory MFI ratings for regulated MFIs. The fact that unregulated MFIs had a voluntary interest in being rated may indicate the positive impact of mandatory ratings on market development. The Peruvian market continued to be the largest market in the LAC region, accounting for 86 of a total of 208 ratings in 2006. The Peruvian market may be one of the few markets to have reached a maturity level; the number of ratings did not change between 2005 and 2006. Fourteen of the 2006 ratings were mandatory. There were two particularly noteworthy shifts in LAC during 2006. First, the number of ratings in Ecuador increased from four to 17; over half of the 2006 ratings were completed by Microfinanza Rating, which opened an office in Ecuador in 2006 and became the countrys first authorized MFI rating agency. The fact that establishing an in-country presence led to such a significant increase in rating clients underscores the growth potential of at least some markets. Second, the number of ratings in Haiti decreased from 12 to one. The Haitian National Network of Microfinance Institutions had encouraged all of its members (18) to undergo institutional diagnostics(funded by USAID) in 2005. The institutional strengthening programs that resulted are currently being implemented, with follow-up ratings or assessments planned for the end of the process. Asia Asia showed considerably less growth than LAC in 2006a net increase of eight assessmentslargely as a result of no growth in its largest market, India (70 of 111 ratings). This situation is expected to change in 2007, because some mandates awarded in 2006 were not completed until 2007. Nevertheless, because the Indian market is already highly penetrated, large increases in the number of Indian MFI assessments are not anticipated. A new development in the 200506 period has been the emergence of PRIME, an MFI rating agency in Indonesia. Sub-Saharan Africa (SSA) There was an absolute increase of six assessments in SSA in 2006, resulting in 30 ratings in total for the year. This relatively underdeveloped market may grow in the future as more private investors become active in the region and as specialized rating agencies increase their on-the-ground presence. Uganda provides a possible road map for the future. Ugandan MFIs have been the biggest issuer of ratings since 1999, with seven of the 26 ratings having been issued in 2006. The increase in 2006 was largely because of an initiative by the local rating fund to finance mini31

assessments. Mali also showed significant growth in 2006, registering nine ratings in 2006, compared to a total of three ratings in the previous seven years. These ratings were financed by USAID and the World Bank. The question for the future is whether these donor-funded ratings ultimately translate into increased market-generated demand for ratings. Eastern Europe and Central Asia (EECA) The EECA region showed noteworthy growth in 2006, with the number of assessments increasing from 19 to 37. The two most significant users of assessments in the region were Bosnia and Herzegovina and Russia. Bosnia and Herzegovina has had a total of 20 assessments since 1999, of which five were completed in 2006. The fact that three of these assessments were repeat exercises reflects their perceived usefulness. Russia has had a total of 15 assessments, of which eight were completed in 2006. This growth reflects increased MFI activity in Russia, with one MFI having recently converted to a bank and another receiving the first license to be supervised by the Central Bank as a non-bank MFI. Several rating agencies mentioned in interviews that this region interests them; therefore the good growth results of 2006 are likely to be repeated. Middle East and North America (MENA) MENA represents the smallest market in terms of the estimated number of MFIs. This is reflected in the number of assessments, which grew from six in 2005 to 17 in 2006. It seems unlikely that the dynamics in this region will change significantly unless there is a large increase in the number of MFIs. Morocco is by far the biggest issuer of assessments; it accounts for half of the microfinance borrowers in the region. Twenty-one of the regions 39 assessments over the past seven years have been for Moroccan MFIs. Seven of these ratings were completed in 2006. With four ratings completed in Morocco in 2005, this is an encouraging trend. The most noteworthy development in 2006 was the inception of an Islamic Development Bank project in Palestine that led to the issuance of eight MFI assessments. These were the first MFI assessments to take place in Palestine.

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