Nexii Webinar Series 2012

M-CRIL Ratings of Impact Investmentswith Sanjay Sinha

September 2012

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M-CRIL’s contribution to impact investing

A company established in 1998 to promote transparency and facilitate the flow of funds into microfinance and other

socially relevant development activities

M-CRIL has undertaken over 1,200 performance ratings of around 900 development finance & other institutions, from

• commercial banks with a microfinance portfolio,

• through rural banks, NBFIs, cooperatives and impact enterprises, to

• village level community development funds

in 32 countries of Asia, former Soviet Union and Africa0

500

1,000

1,500

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Our range of services

Microfinance Institutional Ratings Ratings of Social Enterprises – including MFIs Ratings of Microfinance Investment Funds (MIVs)

Assessment of NGOs engaged in community development

Assessment of Value Chain promotion programmes

Assessment of Low Cost Private Schools

Due diligence, code of conduct assessments

Advisory to banks, aid agencies and apex funders

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Multilateral development agenciesAsian Development Bank, World Bank, IFC, CGAP

FAO, UNOPS, UNCDF

Bilateral agencies Swiss Agency for Development & Cooperation (SDC) Department for International Development, UK

GiZ & KfW Germany

International donor institutionsFord Foundation, Cordaid, Hivos, ICCO, Belgian Technical

Cooperation, Stromme Foundation

Apex institutions/banks/international investorsNHFC South Africa, NABARD, SIDBI India, RMDC

Nepal, Pakistan Microfinance Network, MISFA Afghanistan, Blue Orchard Finance, NMI

Key clients

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Our Associations

M-CRIL was accredited with the CGAP-IDB Rating Fund and is currently accredited with The Rating Initiative of Luxembourg

M-CRIL is a member of the Governing Board of the African Microfinance Transparency

(AMT) forum the Technical Committee of the SMART Campaign

Part of an informal association of international microfinance rating agencies – along with Microfinanza Rating, MicroRate and Planet

Rating

Knowledge partner of the Micro Credit Summit Campaign

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Our Approach

M-CRIL uses a comprehensive rating tool consisting of four categories of indicators: Governance and strategy Management systems Production, technology and marketing Financial performance

M-CRIL reports are an outcome of detailed data analysis, extensive field visits and feedback from customers, staff and management at all levels

The draft report prepared by our analysts is reviewed by the enterprise and by an external rating committee comprised of specialists in finance, sector management and development

The committee critically examines the rating rationale under the assessment areas using benchmarks and analysis norms

The report is finalized and released only after assignment of a specific grade and its endorsement by the rating committee In case of investment recommendations, the report provides an

indicative amount that would be appropriate

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The rating process

Data analysis and report writing

Scheduling and desk analysis

Introductory meeting – Discussions with Senior Management, data gathering

Field visits: Visit to branches, meeting with customers/borrowers

Discussion based on the field visit, follow up on the data, concluding meeting with the management.

Report finalized and sent to the client

Report presented to external Rating Committee

Report sent for enterprise feedback

atM-CRIL

visit to enterprise by a team

of 2 analysts

at M-CRIL

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Major findings from ratingsAreas of achievement by impact enterprises

• Notable outreach to low income customers by MFIs –over 100 million families worldwide

• Substantial funds raised – around $30 billion available for investment in microfinance and other impact enterprises – a supply facilitated by the availability of specialist due diligence services such as rating

• Improvement of management and efficiency of impact enterprises resulting from the application of professional benchmarking tools such as rating

• Availability of downscaled products and services in geographical areas and to segments of the population generally ignored by commercial enterprises

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Major findings from ratings…continued

Areas of concern for investors

• Unbridled growth fuelled by the availability of funds for microfinance: A race for numbers in outreach and lending to microfinance customers that became an end in itself resulting in over-indebtedness and repayment problems in significant areas of operation

• Professionalisation of management is not always successful as managers with commercial experience do not alwaysappreciate the customer empathy necessary to serve low income populations – leading to unsustainable efficiency improvements

• The search for efficiency can result in products and services not necessarily appropriate to the needs of customers of impact enterprises – unsuitable products are often acceptedby such customers since they have no other choice.

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Assessment of impact investment funds• Impact investment funds are entities that aggregate the

contributions of individuals and corporations in specialisedvehicles with the knowledge and resources necessary to make good investments in impact enterprises

• It is often assumed that it is necessary to undertake due diligence/ratings of impact enterprises but investors in funds do not need assessments to inform their decisions due to their physical proximity to the funds and their high level of knowledge of finance

• Yet investments by such funds are in activities with high levels of uncertainty and in geographies far removed from the primary investors. M-CRIL provides an assessment service for impact investment funds to enable primary investors more easily to

understand the investment and risk profile of such funds.

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The promise of ratings for impact enterprises

• Ratings facilitate due diligence of enterprises by impact investors• Ratings provide a basis for comparison between alternative

investments • The process provides managements with a mirror to reflect on

the performance of their enterprises• It identifies strengths and weaknesses in the enterprise’s offering

and performance• The report can be used as a management consultancy document

to improve enterprise performance• It can also greatly facilitate the process of sourcing additional

investments

Ratings represent a positive opportunity for improving functioning as well as enhancing investments in impact enterprises

Thank you