Transcript Slide 1

MicroFinanza Rating:
Setting up adequate Internal
Control Systems
Laura Profiri
Regional Manager Central Asia, Russia and Caucaus
AMFA conference
4-5 October 2012
Content
1. MicroFinanza rating: who we are and what
we do
2. Internal Control Systems in MFR rating
scoring:
 Importance and absolute weight
 What we evaluate
3. Operational risk and Credit risk
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Who we are
 Private and independent rating agency specialized in microfinance and rural
finance
 Rating agency registered in the IADB Rating and Assessment Fund and in the
ADA Microfinance Rating and Assessment Initiative
 Headquarters are in Milan (Italy) with 5 offices in 4 continents
Ecuador: covering Latin America
Mexico: for Mexican MFIs
Kenya: covering Africa
Kyrgyz Republic: covering NIS
and Central Asia
Philippines: covering Asia
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Market coverage
 More than 750 evaluations in 70 countries
 LARGEST MARKET SHARE in 2008 according to the last ADA-KPMG “Rating
Market Outlook Report 2009”
 MicroFinanza Rating has pioneered the social rating for microfinance
institutions, developing an innovative methodology which include the
direct collection of client-level data (120 SR conducted so far).
137
111
116
2008
2009
123
81
53
33
2005
2006
2007
2010
2011
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Different approaches
Pre Rating Services
- Mini – Assessment
- Institutional Diagnostic
Identification of the main internal weaknesses jointly
with the existing opportunities and areas for
improvement.
Financial Rating
- Microfinance rating
- Credit Rating
Evaluation of the risk profile and performances
Social Rating
- Standard Social Rating
- Comprehensive Social Rating
Assessment of the MFI’s capacity to translate its mission
into practice and to achieve its social goals.
Training and Other
- 6 Training Modules
- Other customized services (e.g. Country Screening)
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In the rating scoring
1. Internal Control Systems in MFR rating
scoring:
 Importance and absolute weight
 What we evaluate
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Rating scoring model
The final synthetic rating grade is the result of the scoring of
factors grouped into 6 dimensions:
Dimensions
1. External Context
2. Mission, Governance and Strategy
3. Organization and operations
4. Assets quality and structure
Weight
4%
23%
21%
21%
5. Financial structure and management
18,5%
6. Financial and Operational results
12,5%
Internal Control Systems
INTERNAL CONTROL comprises the MFI’s
mechanisms to monitor risks before and
after operations
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IC and Operational RISK
• It involves all divisions and products of a
financial institution.
• This risk includes the potential that
inadequate technology and information
systems, operational problems, insufficient
human resources, or breaches of integrity
(i.e. fraud) will result in unexpected losses.
Operational RISK is a function of
Internal Controls
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Operational RISK
Transaction RISK: it is particularly high for
MFIs that handle a high volume of small
transactions daily. Since MFIs make many
small, short-term loans there are more
opportunities for error and fraud.
Fraud RISK: is the risk of loss of earnings or
capital as a result of intentional deception by
an employee or client. Effective internal
controls play a key role in protecting against
fraud at the branch level.
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In the rating scoring
Organization and Operations
 Human Resources
 Management Information System
 Processes and Systems
HR policies and procedures
Hiring
Training
Remuneration
Termination
• Moral checks
• Social Attitude
• To promote core values
• Coaching on “zero tolerance”
• Market salary base
• Effective incentive scheme
• Clear message ex-ante
• Gradual termination step approach
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MIS: Reliability of Information
ACCURACY
SECURITY
EFFECTIVENESS
RECONCILIATION ITEMS
MISREPRESENTING THE LOAN PAYOFF
RESCHEDULING
PROCEDURES COMPLIANCE
BREAKDOWN OF PORTFOLIO
LOAN WRITE OFF
LOAN PROVISION
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Internal Control and Internal Audit
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Limits
Segregations of functions
Physical Control
Crosschecks
Dual controls
Computer-related controls
Rotation of duties
Manuals of policies and procedures
Documentation
Independence of Internal Audit
Multi-copy receipts and forms
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Risk Management Framework
Risk Management
Internal Control
Internal Audit
Source: Anita Campion, “Improving internal control, a practical guide for microfinance institutions”,
Technical Guide No. 1, MicroFinance Network with GTZ, 2000.
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Sample of 72 MFIs
Correlation between the Internal Control
Systems' score and the rating grade
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1 (A)
2 (BBB)
3 (BB)
4 (B)
5 (CCC)
6 (C)
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Operational risk often brings to credit risk.
What to do?
Clear distinction between operational risk and
credit risk
Measure, assess and prioritize operational
risk
Control
Monitor
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Contacts
Thank you!!!
MicroFinanza Rating LLC
231 (apt.14) Tynystanov Str.
Bishkek, Kyrgyzstan.
Phone: (+996) 312 624441
Email: [email protected]
www.microfinanzarating.com
[email protected]
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