Microfinance Institutions (MFIs) rating service is a professional assessment of MFI’s credit risk which is a function of a MFI’s exposure to business and financial risks as well as the likelihood of it receiving extraordinary financial support in case of distress. It is a forward-looking assessment of operational performance, financial performance and financial position, risk profile under both normal and stressed operating scenarios, strategy, market position, diversification, governance and management, as well as risk management practices. Effectively, the assessment focuses largely on the MFI’s capacity to honour its general obligations – deposits, borrowings and other liabilities in a timely manner.

Beacon Ratings uses a comprehensive rating tool consisting eight categories of indicators. Under each category are sub parameters to assess an MFI.

Operating environment

• Economic environment: The dominance of the agriculture and services sector in the economic framework of Ghana define the broad economic framework for MFIs. This couple with large unbanked population particularly in these sectors provides significant business opportunities for MFIs.
• Regulatory environment: The MFI regulatory environment is loosely regulated to create conducive and interactive framework for MFIs. The adherence to the regulatory framework by MFIs is assessed.

History and track record: These are assessed using the following factors:

• Number of years in existence
• Geographical coverage
• Number of clients
• Number of branches
• Portfolio size

• Resources base sustainability: Fundraising strategies, current level of efficiency and profitability to test the sustainability level in case of large-scale operation and diversity.
• Organizational sustainability: Ability to develop into a mainstream financial institution.
• Program sustainability: Ability to sustain operations on a larger scale.

Extent of documentation in terms of manuals on MFI’s:

• Products, policies, processes, and authorizations
• Adherence to content of documentation

The robustness of information management system in terms of mitigation of the technological risk, reliability, relevance and quality of information and reporting system are assessed.

• Credit delivery system
• Loan overdue monitoring system
• Cash flow management system
• Delinquency management system

Quality of human resource management and capacity of MFI to attract and retain professional staff are assessed:

• Knowledge of staff on microfinance operations
• Selection and recruitment process
• Training need assessment and training arrangements
• Accountability and responsibility of staff
• Incentive scheme linked to performance of staff
• Staff turnover ratio

Effectiveness of internal control systems, degree of formalization of processes, policies, procedures and effectiveness of internal audit are assessed:

• Loan approval and disbursing processes
• Segregation of duties
• Control systems
• Independent audit and scope
• Internal audit efficiency

Regulatory compliance builds reputation among lenders, donors and others regulators. Thus, extent of MFI compliance with banking laws, regulatory directives and circulars are evaluated.

Market share

Market share of MFI is determined in terms of the deposits mobilised by the MFI in comparison to total deposits mobilised by industry. This provide insight into the stability of liquidity for the MFI. It covers: 

• Core vs non-core deposits
• Retail vs corporate deposits
• Current accounts
• Saving accounts

Asset quality refers primarily to credit quality of earning assets, which comprises loan portfolio and investment portfolio. Quality in terms of the degree to which loans are performing – paid back in accordance with their terms, and the likelihood that they will continue to perform. Asset quality is assessed using:

• Loan portfolio to total assets
• Loan portfolio concentration
• Portfolio at risk – PAR30, PAR60, PAR90
• Restructured loans
• Write-off ratio against industry benchmarks
• Provisions against delinquency
• Non-performing assets/ total assets
• Net non-performing assets/ net-worth
• Non-performing loans and advances/ gross loans and advances
• Non-performing loans and advances provision/non-performing loans and advances

Capital adequacy refers to sufficiency of equity capital and other related surpluses to cushion and absorb any shock that MFIs may experience as a result of losses or diminution of its assets. It includes retained earnings and reserves. An assessment of capital adequacy focuses on the capacity of MFI to absorb future credit losses arising from credit risk, market risk, liquidity risk and operational risks. The following indicators are assessed:

• Conformance with regulatory capital requirement: Compliance with statutory requirement and ability to grow it in the future to meet business requirement.
• Basel II & III, and prudential guidelines: Internal policy to conform with Basel II and III prudential guidelines and maintenance of capital to cushion probable losses beyond regulatory requirement.
• Sustainability of capital adequacy: Adequacy of capital in relation to its growth plans, internal capital generation, risk appetite and interest rate sensitivity.
• Quality of capital: Core Tier 1 capital – equity and Tier 2 – subordinated capital. Hidden reserves such as unrealised gains on investment book, assets revaluation surpluses, and other surpluses.
• Solvency profile: Extent of net non-performing assets to net-worth. It measures the capital coverage of unprovided portion of non-performing assets.

Capital adequacy assessment factors include:

• Equity to total assets
• Equity to loan and advances
• Risk weighted assets to total qualifying capital
• Growth rate of internal capital generation
• Profit retention ratio
• Tier 1 capital to risk-weighted assets
• Tier 1 and Tier 2 capital to risk-weighted assets

Funding and liquidity assessment focus on the MFI’s ability to raise funds to overcome short-term difficulties.

• Funding: Diversification of funding sources – local and international borrowed loans are assessed:

• Demand and term deposits from the public
• Adequacy of funding sources
• Capacity to attract new funding

• Liquidity: Sufficiency of liquidity is measured by the capacity of MFI to meet daily expenses and demand on deposit. On a longer-term basis, liquidity is measured by the degree to which core assets are funded with stable liabilities. The following factors are assessed:

• Expected cash flow
• Capacity to borrow from the market
• Stock of high-quality liquid assets

• Profitability: Strong earning capacity and high profitability of MFI helps build-up capital. Profitability is assessed using:

• Operational self-sufficiency
• Financial self-sufficiency
• Return on assets
• Return on equity

• Efficiency: Sustainability of the MFI is assessed through operational efficiency and staff productivity. Typical measures include:

• Portfolio yield
• Cost-income ratio
• Loan loss provision
• Operational efficiency ratio

Social impact measures the MFI’s impact on employment generation, gender, children’s education, family welfare services, women empowerment, and economic emancipation.

• Social mission: Explicit or implicit statement, alignment with wider development objectives, strategic and systems adherence and track records.
• Outreach: Depth and width of operations in rural areas, socio-economic profile of clients, marginal groups, women groups, and impact on empowerment of women, creation of job opportunity.

Management quality measures the capacity of senior management to manage the business operations and associated risks efficiently.

• Management stability
• Adherence to business and financial plan
• Management pro-activeness
• Management experience and track record
• Capability of the second layer of management
• Management’s understanding of MFI business
• Management’s appetite for risk and risk management

Governance structure in terms of competence and track record in relation to MFIs governance are assessed. Key factors assessed include:

• Board independence
• Board composition
• Board committees
• Board oversight responsibilities
• Transparency in reporting and disclosures
• Board practices and support for management