Factors Explaining the Rating of Microfinance Institutions

Abstract

The growing relevance of Microfinance Institutions (MFIs) has led to the development of specialized MFI rating agencies that perform global risk assessments. In this article, the authors have conjectured different hypotheses pertaining to the relationship between financial and social indicators and the ratings assigned. The authors tested the hypotheses empirically by using MFIs' accounting information and ratings from a leading agency. As expected, the larger, more profitable, more productive, and less risky MFIs achieved better ratings. This proves the usefulness of MFIs' ratings for providers of funds. In contrast, the authors did not observe any relationship between social performance and rating. Given MFIs' important social mission, agencies should develop ratings that accurately reflect the achievement of social goals.

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