Sabrina N. Gordon, Business Reporter

Standard and Poor's, with backing from the Inter-American Development Bank's Multilateral Investment Fund (MIF), is creating a credit rating scheme for microfinance institutions.

The MIF has provided a US$405,000 grant for the pilot project, which the agency says is meant to open doors to cheaper credit for financiers of small companies.

"We have been in talks with S&P about the need to develop globally accepted ratings for MFIs since 2006," Sergio Narvajas, project team leader and a microfinance specialist with IDB's multilateral Investment Fund, told the Financial Gleaner.

Project under way

S&P is also a financier of the project, but did not disclose its contribution.

The project is already under way and is on a timeline for completion in 2009.

S&P is devising the rating methodology as well as a ranking system tailor-made for micro-finance institutions or MFIs that will be subjected to the rating agency's standard review process.

Ten MFIs from the Caribbean and Latin America will be selected as guinea pigs, and are to be rated using the S&P's new scheme. A report on the findings is to be disseminated among the microfinance industry and global investors.

"S&P is aiming to garner as broad and diverse a group as possible, one that includes MFIs from several countries and different associations and with different goals - some will be profit-oriented and others not-for-profit," said Narvajas.

Building domestic markets

At the end of the pilot, S&P will continue to rate MFIs at individual institutions' request.

That service, however, will at that point require payment of a cover fee.

The project, the MIF anticipates, will help build domestic capital markets by providing local investors a tool that allows them to compare an investment in microfinance with an investment in another industry.

If it works, it should also allow the best rated MFIs to raise resources more cheaply, said Narvajas, allowing them to issue loans at cheaper rates and expand their lending operations.

In fact, Narvajas notes that the evolution of a rating scheme for small financiers could kick-start a new wave of venture capital operations.

Demanding standard metrics

"Like any investors, venture capitalists seek independent views on the sustainability of their target investments and look for exit strategies," he said.

"While many forces are critical to developing any investor class, the availability of comparative information that allows for risk/reward calculations is generally a basic need."

Jane Eddy of S&P noted in a release that in the past, the lack of consistent, globally-accepted metrics for analysing MFIs has hindered investment to the sector, saying most investors are now demanding standard metrics before committing capital.

Narvajas said that a collaboration with other agencies involved in microfinance - such as the World Bank's Consultative Group to Assist the Poor, the Microfinance Information Exchange and ACCION International - laid the ground work for the pilot programme.

The MIF in January also approved a US$1.9 million grant at the end of January for a capacity building programme among Caribbean micro financiers.

sabrina.gordon@gleanerjm.com