Microfinance and rating

Abstract

This master thesis starts by introducing the concept of microfinance. It shows that MFI rating is an important tool in achieving transparency. The study attempts to determine the relationship between social and financial indicators and the MFI rating grade. These indicators are chosen based on previous studies on ratings and microfinance. The data comes from ratings reports performed by five major MFI rating agencies: MicroRate, Planet Rating, Microfinanza, Crisil and M-Cril. Data transformation was used to achieve normal distribution of the variables. The empirical research was carried out using multiple regression analysis. A few equations were tested to find the optimal model. The findings of the study revealed that MFI size, risk, profitability, productivity and efficiency are significant determinants of rating grades. Larger and less riskier MFI tend to get better rating grades. Increasing profitability, productivity and efficiency of the MFI will increase the rating grade. No significant relationship between the social performance of MFI and the rating grade assigned was found. Control variables were used to account for the possible affect of MFI region, motive (profit or not) and agency that performed the rating. Only one out of six regions was significant in explaining the model - Europe and Central Asia. It didn’t matter whether MFI was a non-profit organization or not. The grade was, however, affected by the agency that performed the rating.