MICROCAPITAL STORY: Microfinance firms in the Philippines take to ratings

In a recent report by Paolo Luis G. Montecillo in the Business World in the Philippines, it was observed that microfinance institutions in the Philippines have started to approach international rating firms with the hope that independent ratings will attract foreign investments and improve institutional operations. The president and chairman of Rural Green Bank of Caraga, Joseph Omar O. Andaya, noted that the bank was able to obtain a million-peso loan after securing a rating from Milan-based Microfinanza Rating. In addition, the assessment by Microfinanza Rating allowed Mr. Andaya to learn about institutional strengths and weaknesses of his institution, the latter of which included high operating costs and inefficient operations. Rural Green Bank is now in discussions with Blue Orchard Microfinance Investment Managers, a Switzerland-based fund, in relation to a loan for an amount almost equivalent to a quarter of its 1.6-billion peso loan portfolio. The Green Bank was established in 1975 and has a 4-diamond rating on the MIX Market portal. It does not appear to have submitted updated information for 2008. However, latest figures on the MIX Market portal show that Green Bank has a gross loan portfolio of USD 30,524,872 and 72,742 active borrowers as at 31 December 2007. Green Bank’s key sources of funding are loans, savings and shareholder capital.

Apart from Microfinanza Rating, Planet Rating and Microfinance Innovation Center for Resources and Alternatives (MICRA) are active in the microfinance sector in the Philippines. Planet Rating, a global microfinance rating agency headquartered in France, made a strategic decision to set up their East Asian office in the Philippines. According to James Soukamneuth, Planet Rating director for Asia, who spoke about the benefits of being rated at the recent 2009 RBAP Annual National Convention in Manila, ratings would promote sound, sustainable and transparent growth in the microfinance sector of the Philippines. As the sector is experiencing ongoing commercialization, professionalization and innovation, ratings would offer significant guidance to and enable Filipino microfinance institutions to benchmark themselves against international best practices. He noted that the Philippines lagged behind its neighbours, such as Cambodia, in adopting the rating culture because Filipino microfinance institutions tended to approach large banks for wholesale loans. Mr. Soukamneuth added that a more entrenched independent rating culture amongst microfinance institutions in the Philippines would make the sector more attractive to a wider range of market participants, including institutional investors. He added that wholesale funders would also be better able to assess the creditworthiness of a microfinance institution on the basis of independent ratings. Additionally, ratings would allow regulators to more effectively undertake due diligence of financial institutions under their supervision.

Ratings are also being advocated by key participants in the microfinance sector in the Philippines. Tomas S. Gomez, outgoing president of the Rural Bankers Association of the Philippines (RBAP), has been promoting the rating culture amongst rural banks, which are the most active players in the Filipino microfinance industry. The central bank is also supportive of a more widespread rating culture. Pia B. Roman, head of the banking advocacy group of the Bangko Sentral ng Pilipinas, believes that ratings would enable microfinance institutions to have better access to institutional investor funds and potentially draw back investors who had exited the emerging economies prior to the credit crisis.

The benefit of ratings is not a new phenomenon. As previously reported by Microfinance Insights, independent ratings will allow the variety of players in the microfinance sector to make effective comparisons between microfinance investment opportunities and non-microfinance opportunities.
The development of a rating methodology for microfinance institutions by leading mainstream rating agencies such as Standard & Poor’s will only serve to provide additional comfort to institutional investors who are familiar with the mainstream rating framework. The support for ratings is not unique to microfinance institutions in Asia. As reported in a recent Microcapital story by Laura Anderson, the Inter-American Development Bank (IDB)’s Multilateral Investment Fund and Corporacion Andina de Fomento have announced that they will support a project to assist small-scale microfinance institutions in Latin America and the Caribbean obtain credit risk ratings and performance assessments. By way of background, 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 which focused on 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. Each of the IDB, CGAP and the European Union contributed significant amounts to the Rating Fund: the IDB committed USD 877,000; CGAP committed USD 1.8 million; and the European Union committed EUR 1.85 million. By the end of 2007, the Rating Fund had co-financed up to 80 percent of the cost of more than 429 ratings.

In furtherance of the IDB’s support for the rating culture, its latest project in the form of the Multilateral Investment Fund as reported recently by Microcapital will help cover part of the cost of the credit risk ratings and performance assessments for the targeted Latin American and Carribean microfinance institutions. Ultimately, it is the intention and hope of key players in the microfinance sector that independent and widespread ratings will improve transparency in the field of microfinance globally and facilitate microfinance-related investment decisions on the part of international and other investors.

By Berny Chong, Research Assistant

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