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Challenges And Aspects Do Matter In Rating MFIs

to determine the weight for the variables to consider them for the five areas of CAMEL.

Tina S
Tina S
Mar 14, 2010
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A major problem with the rating of MFIs is  to select the variables responsible for as there is no specific framework for that so that statistical significance can be tested. The challenges of the study is to determine what aspects do matter with the rating of MFIs. Why the existing rating system for the formal sector is not suitable for this sector? Determining  the accounting ratios do matter in rating MFIs and relate them with the CAMEL components are also considered a big challenge for this work considering whether there is a significant relationship of the CAMEL components with the performance of an MFI .
 
Finally to determine the weight for the variables to consider them for the five areas of CAMEL.

Capital adequacy and Risk vs. Rating

From the general concept of capital management it well known to us that capital adequacy is important to maintain so that the risk will be offset. So it is important to get the answer what should be the measure of capital adequacy and risk for MFIs activity and whether capital adequacy and risk related with rating?

Scale, Outreach and Growth (Size) vs. Rating

Outreach which indicates the size is the measurement of scale for the operation of an MFI. The more of the outreach of an MFI the more of the scale or size will be considered. But the question is  what should be the measure of scale and outreach and whether there is a positive and significant relationship between MFI size and rating?

Portfolio quality and Profitability vs. Rating

Portfolio quality and profitability of an MFI is related significantly. There is a positive relation between portfolio quality and profitability of a financial organization organization. Though there is a set of ratios for portfolio quality and profitability but the question to be answered that whether there is a positive and significant relationship between MFI profitability and rating assigned?

Productivity and Efficiency vs. Rating

Productivity and efficiency are positively related for any organization –there is no confusion about it . Productivity and efficiency are to be defined in the context of MFIs then to get the answer that where there is a positive and significant relationship between MFI efficiency and productivity with rating?

Sustainability vs. rating

To think about rating means to think about risk. Risk is a key issue in the rating process because the rating expresses the likelihood of company to meet its repayment commitments. Poon et al (1999) find a significant relationship between risk variables and rating assigned to financial institutions. So there is a need to find the answer where there is a negative and significant relationship between MFI risk and rating assigned?

Social performance vs. rating

There is a dilemma of considering social performance in rating MFIs which is also goal for MFIs.

Should the rating incorporate social performance issues? Or, would it be necessary to create specific ratings to measure social performance? If MFIs with good social performance have also a good financial performance, only one rating will be necessary. Arguments in favor of MFIs are that the poor give back their credits.

For example, Grameen Bank, well known as a successful model that has surpassed the frontiers of the MFI world, has reported repayment rates of 98% serving over two million landless borrowers; Morduch (1999). Also, lending rates are high enough to guarantee MFI survival; Conning (1999); and MFIs reaching their social aims are able to get more money from donors.

However, empirical research shows that it is difficult to discover MFIs excelling in both the social and financial fields; Morduch (2000). Facing this dilemma, we are trying to take part for any alternative, but the hypothesis may be tested  to get the answer where there is a positive and significant relationship between MFI social performance and rating assigned.



Author's note: A model is preparing for proper rating of MFIs variables. This is the challenges of that project.
Keywords: MFI,camel,microfinance,microcredit,grameen bank,ratio,portfolio,financial,variable,hypothesis,test,social,performance,profitability,rating,borrowers.



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