Microfinance East

My personal favorite moment from Day One of the Microfinance East Conference was a reprise of Damian von Stauffenberg's spirited critique of mainstream rating agencies S&P, Fitch and Moodys. (He took a similar tack at a November MFCNY Ratings event.) The MICRORATE founder joined Emmanuelle Javoy of PlaNet Rating, and Gary Kochubka of S&P on the panel and made some important (perhaps somewhat contradictory) points. He rightly pointed out that the mainstream raters have relatively little involvement in the industry. S&P, von Stauffenberg pointed out, has rated approximately 20 MFIs in all (compared to the over 400 ratings done by MICRORATE). And certainly, for those familiar with the industry, MFIs are far more likely to engage MICRORATE, Microfinanza, PlaNet Rating or other specialized microfinance raters over the mainstream agencies. And this, for von Stauffenberg, is a wasted opportunity. If mainstream raters were to enter in earnest it would provide an enormous boost of investment into the sector.

His second point was that the mainstream raters simply don't know how to rate MFIs. Microfinance is different and complicated. It requires a deep evaluation of assets, in the field, at the branch-level, with a good look at overindebtedness in the particular market, and not simply a desk review using mathematical models. (Moreover, he stated, given their role in the financial crisis, perhaps the mainstream raters don't know how to rate anything properly.)

Kochubka defended himself stating that S&P did not do "quickie" ratings, as von Stauffenberg called them, nor were the ratings model-driven. But aside from this denial, von Stauffenberg's remarks were not substantively responded to.

Von Stauffenberg also touched on the very important issue of conflict of interest. There is a fundamental conflict built into the current microfinance rating business model in that MFIs pay for their own rating. Its unclear what a different model would look like and the issue was avoided by Javoy and Kochubka. Another troubling potential conflict is the fact that some raters are affiliated with investment managers (the PlaNet group, for instance) and more should have been spoken about how those conflicts are managed.