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May 24, 2006
Using the Same Tape Measure: MicroRate To Launch Tool for Rating Microfinance Funds
    by Bill Baue

The rating tool, a project supported by Gray Ghost Microfinance Fund, Omidyar Network, and Gates Foundation, is yet another step toward establishing microfinance as a distinct asset class.


Microfinance, which provides tiny loans to help people bootstrap out of poverty by running small (often one-person) businesses, took another step toward becoming a distinct asset class with the advent of a mechanism for objectively rating microfinance funds. MicroRate, an independent company that already rates microfinance institutions (MFIs), has been working to develop a microfinance fund-rating tool for several years. At a May 1 Silicon Valley Microfinance Network (SVMN) talk, Bob Patillo of the Gray Ghost Microfinance Fund (a $75 million microfinance "fund of funds") announced a project to support the MicroRate rating tool that is also backed by the Omidyar Network and the Gates Foundation.

"This rating tool is critically important in advancing microfinance as a distinct asset class because it is the first attempt to stop comparing apples to oranges, which is what investors have been forced to do when shopping for microfinance investment products," said David Satterthwaite, CEO of Prisma MicroFinance and a moving force behind MicroCapital, a website that provides "honest, no-frills" information on microfinance.

"That's really the point of it--we're rating all of the investments with the same tape measure," said Damian von Stauffenberg, founding principal of MicroRate, which conducted a broad survey of the microfinance fund market in developing the rating tool. "We found 59 funds or investment vehicles that invest in microfinance institutions in the Third World, and we're trying to help investors figure out which of those 59 most suits them."

MicroRate began working on the fund-rating tool in 2004.

"We prepared a series of fund profiles, which were largely descriptive, but which already contained some elements of judgment," Mr. von Stauffenberg told SocialFunds.com. "We stopped that effort after evaluating eight microfinance funds, because at the time we couldn't see a market that would be large enough to justify the high cost of coming up with high-quality fund evaluations."

The support of the Omidyar Network, a mission-based investment group run by eBay founder Pierre Omidyar and his wife Pam, and the Gates Foundation, endowed by Microsoft founder Bill Gates and his wife Melinda, suggests that the market exists. The Omidyar Network supports only for-profit microfinance enterprises, a tactical decision demonstrating belief in the market strength of microfinance. The Gates Foundation entered the microfinance arena last year with grants to two MFIs, Opportunity International and FINCA International, earmarked for work on the foundation's mission of HIV/AIDS prevention and education.

Mr. Satterthwaite parsed the distinction between granting money to support MFIs and actually investing in them, which is after all what they are designed for.

"Particularly encouraging, the Gates Foundation's participation could signal an understanding that microfinance is not charity," said Mr. Satterthwaite.

Indeed, MicroRate will not only provide descriptions of the funds, but also financial performance measurements.

"We are going to come out with a brief report on each microfinance investment vehicle that describes its characteristics, risk profile, geographic distribution, and then measures them on a number of performance indicators, the most obvious of them are rate of return and efficiency--how high are their administrative costs, how expensive is it to run that fund," said Mr. von Stauffenberg.

MicroRate is still in the process of developing and fine-tuning the ratings tool, but intends to introduce the product to the market by mid-summer.

"To ensure fairly wide acceptance, we are negotiating it with some of the main players in the industry," said Mr. von Stauffenberg. "The next month or six weeks is going to be filled with very intensive investor interviews--we want to speak to a few dozen potential investors and fly the prototype of our product by them to see if it's something they like."

"Our timetable allows for another two months for us to put this in place--we're aiming for the end of July," he concluded.

 

 
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