MICROCAPITAL STORY: Inter-American Development Bank’s Multilateral Investment Fund (MIF) and Corporation Andina de Fomento (CAF) Back Ratings For Microfinance Institutions

The Inter-American Development Bank’s (IDB) Multilateral Investment Fund (MIF) and Corporacion Andina de Fomento (CAF) have announced they will support a project to assist small-scale microfinance institutions (MFIs) in Latin America and the Carribbean obtain credit risk ratings and performance assessments. The new project will give priority to MFIs with loan portfolios between USD 1 million and USD 15 million, with average loans not exceeding USD 3,000. The MIF and CAF will help cover part of the cost of the credit risk ratings and performance assessments: the MIF will provide a grant of USD 986,161, CAF will provide USD 200,000 and participating MFIs will provide USD 400,000.

In May 2001, the IDB and the Consultative Group to Assist the Poor (CGAP) launched a joint initiative called the Microfinance Rating and Assessment Fund targeting MFIs in six geographic regions with assets ranging from USD 300,000 to USD 30 million. The European Union subsequently joined the Rating Fund in January 2005. The IDB committed USD 877,000, CGAP committed USD 1.8 million, and the European Union committed EUR 1.85 million. The fund provided co-financing of up to 80 percent of the cost of a rating or assessment. At the end of 2007, after co-financing more than 429 ratings, the fund phased out its subsidies for ratings.

As reported by Microfinance Insights, MFI stakeholders, institutional investors, fund managers, and emerging market specialists all identify the need for a globally accepted set of metrics which would allow comparisons between microfinance investment opportunities as well as with non-microfinance opportunities. The benefits to MFIs include a wider investor base, lower borrowing costs, and the ability to benchmark themselves versus their peers. Currently several companies specialize in rating microfinance institutions including Micro-Credit Ratings International Limited (M-CRIL), Planet Rating, Microrate, and Microfinanza Srl. In 2007 Standard and Poor’s (S&P) developed a global credit rating framework for MFIs. Ratings by mainstream agencies such as Fitch and S&P are becoming more prevalent in the microfinance industry as the sector has grown and attracted the attention of global capital market investors who are more familiar with the larger rating agencies’ standardized rating format.

The IDB was formally created in 1959, when the Organization of American States drafted the Articles of Agreement establishing the Inter-American Development Bank. The IDB lends money, provides grants and research, and offers technical assistance and advice in 26 countries throughout Latin America and the Caribbean to small businesses, central governments and city authorities. The IDB Group is composed of the Inter-American Development Bank, the Inter-American Investment Corporation (IIC) and the Multilateral Investment Fund (MIF). The IIC focuses on support for small and medium-sized businesses, while the MIF promotes private sector growth through grants and investments, with an emphasis on micro-enterprise. The IDB has 48 member countries, with the 26 Latin American and Caribbean countries in the IDB holding 50.02 percent of the voting power. The single largest shareholder is the United States, with 30.01 percent. According to its website, the IDB has lent or granted over USD 10 billion in the last 12 months.

The MIF was established in 1993 to promote broad-based economic growth through private sector development, particularly micro-enterprises and small businesses. There are 38 member countries in the MIF. The organization partners with civil, private and government partners which contribute from 30 to 50 percent of the total project cost, depending on the country. The fund was originally equipped with USD 1.2 billion, with the United States and Japan each contributing USD 500 million. MIF investment projects typically fund private financial institutions, such as banks, cooperatives, microfinance institutions or NGOs, who can then on-lend the resources to the benefit of micro and small businesses region wide.

Established in 1970 in Caracas, Venezuela, CAF is a multilateral financial institution that mobilizes resources from international capital markets to Latin America. The scale and scope of its operations since inception have expanded to include operations related to integration and economic growth, knowledge and technology transfer, competitiveness, governance, democracy, reaffirmation of ethical values, modernization of the State, decentralization, strengthening of financial systems, and privatization. CAF’s biggest shareholders are Venezuela, Colombia and Peru. As of December 31, 2008 the organization had a total loan portfolio of USD 10.3 billion, total assets of USD 14.3 billion, and net income of USD 311 million, representing a return on equity of about 6.8 percent.

CAF just issued USD 1 billion worth of 10-year bonds on the international capital markets at a spread of 450 bps over US Treasuries. It will use the money to help fund its lending operations in Latin America. CAF aims to increase loan approvals this year to USD 9 billion, as Latin American countries request more trade financing and emergency liquidity amid the global recession, bank President Enrique Garcia said in March. Last year, the bank approved about USD 7 billion in loans, he said.

By Laura Anderson, Research Associate

Additional Resources:

International Business Law Services: LATIN AMERICA: IDB, CAF Back Ratings for Microfinance Institutions

Inter-American Development Bank: Home

Multilateral Investment Fund: Home

Corporacion Andina de Fomento: Home

Planet Rating: Home

M-CRIL: Home

Microrate: Home

Microfinanza: Home

The Microfinance Rating and Assessment Fund: Home

Standard and Poors: Home