This Resource Guide compares five of the better known microfinance institution (MFI) assessment services and describes the challenges facing such assessments. It is part of a trilogy of CGAP reports on financial transparency in the microfinance sector and should be used in combination with the other two: Focus on Financial Transparency describes the activities of CGAP and other industry players in this area, while Financial Transparency: A Glossary of Terms defines the often confusing terms related to financial transparency.
Financial transparency is about the production, testing, dissemination, and use of information related to an MFI’s financial performance. Beginning with an MFI gathering and reporting accurate information, the sequence extends to verifying the information, then to analyzing, comparing, and judging the performance described by that information, and finally to supervising the MFI to ensure it complies with applicable standards. As the initial steps, management information systems (MIS) and internal control are responsibilities of the MFI itself, while the remainder of the steps are done by external parties. External auditors simply verify the information reported in the MFI’s financial statements. Assessment or rating services analyze and evaluate or rate that performance, sometimes using industry databases to compare the MFI with similar institutions. Supervisors are authorities, usually governmental, responsible for insuring acceptable performance.
This note focuses on assessment methodologies for MFIs. Assessments are holistic evaluations of MFIs’ financial and overall performance. Assessments are offered by microfinance networks as a management tool for their affiliates. Likewise, donors and investors use assessments in making decisions about whether to fund an MFI.