Download - Risk Model Presentation for Risk and DD
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New STAR
Risk Rating
Model
August,2010
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Kivas STAR Risk Rating Model
What does the STAR Rating measure?
The Kiva STAR Rating is a measure of institutionalrisk or the risk of the Field Partner defaulting.
The Kiva STAR Rating does not give an indication ofwhether individual borrowers will default.
The Kiva delinquency rate and the Kiva default rate haveno impact on the rating since they do not indicate when anMFI is about to default.
Conversely, the credit quality of the MFIs total portfolio isincluded in the risk rating since it is an indication of itsprobability of defaulting.
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Kivas STAR Risk Rating Model
Developed in 2010 based on Kivas experiencein working with Microfinance Institutions inover 50 countries
Comprised of
10 Global Categories with,
38 Variables and
Specific sub-variables with assigned riskweightings of 1 to 5 for each Variable
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Kiva Risk Rating Model 10 Categories
Star Rating Model
Financial Audit
Management
Staff
Liquidity Planning
Transparency
Capital
MIS and Controls
Earnings
Board
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Categories with associated Variables
Qualifications
Track Record
Structure
Reputation
Board
Qualifications
Track Record
Structure
Reputation
Management
Staff Resources
HR Management
Staff
Process
Quality
Funding Gaps
Planning
Audit Result
Audit Confidence
Audit
Operational SelfSufficiency
Risk Coverage Ratio
Operating ExpenseRatio
Earnings
Current Ratio
Cash Flow Planning
Sustainability of
Funding Sources
Liquidity
Gross Loan Portfolio
Leverage Ratio
Portfolio Divers.
FX Gap
FX Hedging Policies
Asset QualityIndicator
Capital
Internal Audit
Internal Audit Quality
Quality of internal
Controls MIS Quality
MIS Reports
MIS Usability
MIS and Controls
FunderOversight
Regulatory Oversight
Micro Finance Rating
Review
Association
Network
Transparency
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Board of Directors
1. Qualifications backgrounds and skills ofBoard members including whether there ismicrofinance experience.
2.
Track Record level of engagement ingovernance of the MFI.
3. Structure existence of regular meetingsand whether there are conflicts of interest.
4. Reputation Board can garner externalsupport for the MFI.
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Management
1. Qualifications backgrounds and skills ofthe MFI Management.
2. Track Record ability of MFI Management to
address vulnerabilities and meet objectives.3. Structure adequacy of management team
structure, the existence of key person risk andwhether there are conflicts of interest.
4. Reputation Management can garnerexternal support for the MFI.
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Staff
1. Staff Resources staff has adequate skilllevels, does not show excessive turnover andthe organization is not under-staffed.
2. Human Resource Management existenceof sound compensation and incentivemechanisms as well as staff development
activities.
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Planning Activities
1. Planning Process existence of a strategicplan and how it is developed.
2. Planning Quality the credibility of the
strategic plan and its extensiveness in dealingwith external factors and knowncontingencies.
3. Planning Funding the plan identifiespossible funding gaps with sources of fundingidentified or contingency plans developed.
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Audit Review
1. Audit Result whether the audited financialstatements are unqualified or not
2. Audit Confidencewhether the external
audit firm has microfinance experience andthe quality of the audited financial statementsfootnotes.
Please note that the audit score serves as acap for the next three scores that are basedon the financial statements
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Earnings
1. Operating Self SufficiencyO
peratingRevenue / (Operating Expense, FinancingCost and Bad Debt Expense).
2.
Risk Coverage Ratio Loan Loss Reservedivided by the level of Portfolio at Risk over30 days (PAR30).
3. Operating Expense Ratio OperatingExpenses / Average Gross Loan Portfolio.
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Liquidity
1. Current Ratio Current Assets / CurrentLiabilities.
2. Cashflow Planning the extent to which the
MFI forecasts its cash position throughout ayear.
3. Sustainability of Funding whether the
organization can replace funding if Kiva wereto halt operations with the MFI.
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Leverage
1. GLP Size size of gross loan portfolio.2. Leverage Ratio Total Liabilities / Equity.
3. Portfolio Diversification concentrationlevels in any region or activity.
4. FX Gap Foreign Exchange Gap ordifference between assets and liabilities inforeign currency.
5. FX Hedging how FX risk is managed.
6. Asset Quality Indicator Write-offs duringyear plus level of PAR30.
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Internal Controls and MIS
1. Internal Audit Structure existence ofinternal audit function and autonomy.
2. Internal Audit Quality the function hassufficient resources and sound procedures.
3. Quality of Internal Controls clear controlmechanisms and sound cash management.
4. MIS Quality the soundness of MIS
5. MIS Reports quality / frequency of reports
6. MIS Usability the ease of MIS use andexistence of appropriate backups.
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Transparency
1. FunderOversight existence of otherfunding sources and their potential oversight
2. Regulatory Oversight existence of stronglocal regulatory authority for the MFI
3. Rating Reviews extent to which MFI hasgotten external ratings.
4. Association relation with a local
microfinance association and the extent ofadvocacy and quality of information shared.
5. Network whether the MFI is part of an
international network that provides support..