risk model presentation for risk and dd

8/8/2019 Risk Model Presentation for Risk and DD

1/15

New STAR

Risk Rating

Model

August,2010


2/15

2

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.


3/15

3

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


4/15

4

Kiva Risk Rating Model 10 Categories

Star Rating Model

Financial Audit

Management

Staff

Liquidity Planning

Transparency

Capital

MIS and Controls

Earnings

Board


5/15

5

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


6/15

6

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.


7/15

7

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.


8/15

8

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.


9/15

9

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.


10/15

10

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


11/15

11

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.


12/15

12

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.


13/15

13

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.


14/15

14

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.


15/15

15

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..

risk model presentation for risk and dd

Documents