News

  • Notation Social

07.29.2011

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MicroWorld

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How do social performance ratings work with microcredit?

Social rating exists so that the social performance of microfinance institutions (MFIs) can be evaluated. Specialised agencies analyse the MFIs commitment to non- financial objectives like price transparency or how much importance is accorded to the poorest clients. But out of the 10 000 MFIs in the world (of which 1800 are registered with MIX Market), less than 300 have already been evaluated 1.

Microfinance rating, which came into being at the end of the nineties, initially focused on financial criteria as well as institutional performance: debt and portfolio risk ratios, return on capital, governance, etc. but in the middle of the 2000s, as Arvind Ashta, holder of the Microfinance Chair at the ESC Dijon, explains “the growth of the sector threatened to place the original social mission in second place.” Thus social rating came into being, practiced today by a dozen or so agencies of which four dominate the market. Most of them produce both social and financial ratings at the request of the MFIs or potential investors.

The analysts opinion

“Social rating is an external expert opinion on the social performance of a microfinance institution,” explains Vitali Bumaco, associate researcher in microfinance at the ESC Dijon. More than an opinion, it is a form of audit associating the analysis of information supplied by the MFI with the reports gathered by the rating agency which questions all the stakeholders: employees, clients and the ruling authorities.

“The agency’s ability to understand the MFI from the inside and the context of the country is essential in order to provide a credible rating,” adds the researcher.

A scale of Analysis

The Planet Rating agency scale goes from 0, “no social intention” to 5, the maximum. Fondesurco, a Peruvian MFI (Microworld partner), can therefore rejoice having been awarded a 4, following the agency’s visit in 2010. This signifies a “convincing” social rating.

Whether it is from “alpha” to “gamma” as in the M-CRIL agency rating or from 1 to 5 at Planet Rating, the various social dimensions of the MFIs are each given a rating: the presence or not of a solidarity factor in the MFI’s mission, the level of financial inclusion and client protection, HR policy, the existence or not of non-financial services (training…). Each indicator is then considered in order to obtain a global average.

How does the social rating of an MFI work?
Explanations in images by Emmanuelle Javoy, Chief Executive Officer of PlaNet Rating.

Is rating a risk?

The exercise can turn out to be cruel: the Planet Rating site displays several MFIs with a rating of 1 or 2. This “bad mark” makes these MFIs unlikely to attract social investors. But by pointing out inadequacies, these MFIs can work on their weak points. “It is not so rare that an MFI has more need of technical assistance than access to donations or a loan at commercial rates,” explains Edouard Sers, from the Planet Rating Agency.
Nor is it enough to have a good rating to be perfect. Since the final rating is an average which summarises all the different points it can also underestimate weak points: “Compartamos, in Mexico was rated 4 out of 5 even though its interest rates were quite high,” Vitali Bumaco points out.
Moreover it is possible to be an MFI which performs well socially, and not be rated. This is the case of small MFIs with the status of cooperatives or MFI savings banks: these are “less dependent on international funding thanks to their members’ savings and they don’t need to be rated,” adds Vitali Bumaco.

How can social rating evolve?

Rating methods are evolving. Consequently in January 2010 Planet Rating reinforced consideration given to client protection, the fight against over-indebtedness and the general level of transparency.

This is a “welcome” development according to Professor Arvind Ashta who in addition insists that social rating is not the same as the evaluation of social impact. According to him the impact of microfinance, particularly in terms of a genuine way out of poverty, remains the domain of statistical studies and possibly of the PPI of the Grameen Foundation , but does not yet call for an agency social rating.

While awaiting the evaluation of the social impact, the establishment of a global rating which is capable of taking account of both the financial and social aspects remains the objective. Edouard Sers at Planet Rating confirms that this is quite a big challenge: “Merging social and financial rating helps to distinguish the MFIs which achieve the “double bottom line” as it is known amidst Anglo-Saxons, i.e. conciliating social performance and the fact of being financially sound. To be able to conciliate these two aspects is a thrilling challenge.”
A perspective to watch for.

(1) In its report “Microfinance rating market review 2010”, the Rating Initiative estimates the number of MFIs socially evaluated between 2006 and 2009 to be 139.
This article is part of the special report: