Credit ratings' role in MFIs, marginalized communities

By Guardian Reporter , The Guardian
Published at 04:54 PM Apr 08 2024
Hassan Mansur, Director of ICRA Tanzania
Photo: File
Hassan Mansur, Director of ICRA Tanzania

CREDIT ratings are said to be crucial for microfinance institutions (MFIs) striving to provide marginalized communities and small businesses with access to financing.

This was revealed at a recent webinar organized jointly by the International Credit Rating Agency (ICRA) and the Tanzania Association of Microfinance Institutions (TAMFI).

Speaking at the event, Hassan Mansur, Director of ICRA Tanzania, explained that credit rating serves as proof of an entity's creditworthiness and repayment capability.

“Credit ratings play a vital role for microfinance institutions (MFIs) seeking to empower marginalized communities and small businesses with much-needed financing,” he clarified.

Adding: “These institutions require funding to promote financial inclusion and a good credit rating can help them access international funding and investments, thus enhancing their impact.”

Mansur, believes that the overwhelming support that ICRA received, has extremely pleased and motivated the agency to continue providing exceptional services to its clients.

Microfinance institutions depend on their credit rating to secure various financing options such as loans and investments.

Therefore, a positive credit rating from an established credit rating agency such as ICRA, means lower borrowing costs as well as allowing MFIs to serve more people and expand their reach.

“A strong credit rating builds trust with lenders and attracts investors, making it easier for MFIs to secure long-term, low-cost capital. This financial stability enables them to offer more affordable services to their clients,” says Mansur.

In addition to funding, TAMFI’s CEO, Winnie Terry, explained that credit ratings also encourage growth and innovation within MFIs.
“By improving financial management and governance, MFIs can become more agile and innovative in their approach.

 Enhancing credibility, facilitating access to funding, and reducing borrowing costs, credit ratings empower MFIs to positively impact the communities they serve,” adds Roanna Peat, Chief Financial Officer of Agora Microfinance N.V. (AMNV).
What is credit rating.

A credit rating is a tool used to determine the creditworthiness of an entity, including individuals, groups, corporations, non-profit organisations, governments, and even entire nations. In order to determine whether or not these borrowers would be able to repay loans on time, specialised credit rating companies analyse their financial risk.

A high credit rating increases credibility and shows a solid track record of timely loan repayment in the past. It helps banks and investors to determine whether to invest in a debt instrument, approve loan applications and decide the rate of interest at which the loan should be extended.

A credit rating is used to evaluate a corporation or company's creditworthiness rather than an individual's. The rating is generated using corporate financial instruments and is often presented as a list of alphabetical symbols.

A potential investor's choice of whether or not to purchase bonds is also heavily influenced by credit ratings. A risky investment invokes a poor credit rating. That's because it shows a higher likelihood that the organisation will not be able to pay its bond obligations.

As credit scores are dynamic and not fixed, borrowers need to constantly work on keeping them at a high level. They fluctuate frequently based on the most recent data and even one negative debt can lower even the best rating.

Importance of credit rating for investors
A credit rating shows the ability and willingness of a borrower to repay a loan without defaulting. Through a credit rating, investors can learn about the issuing company's financial stability and the instrument's credit quality.

Also, the rating symbol denotes the degree of risk associated with it. A highly rated company's instrument guarantees investors' investment security and bankruptcy protection.

The credit rating's rating symbols are clearly identifiable and can be understood at a glance. By understanding the rating, they received, investors can gauge the risks associated with their assets.

Despite being backed by strong finances, credit instruments are difficult for investors to evaluate. Therefore, for the advantage of investors, the credit rating agency gathers, examines, and interprets the complex information in a simple manner.

When an organisation hires a credit rating agency it indicates that it is confident of its operations and the management is open to independent scrutiny. As the rating agency is independent of the issuer company and has no vested interest, therefore rated securities increase the dependability of the rated instruments for investors.

In these times, investors have a variety of credit instruments they can choose to invest in depending on their risk tolerance and divernsification strategy. Credit rating offers investors an objective and unbiased view to help them choose the most suitable investments.