Fitch has assigned a long term issuer default rating of B minus with a stable outlook to Uzbekistan-based Microcreditbank (MCB). According to a Morningstar press release, MCB’s long- and short-term ratings are underpinned by the Uzbekistan government’s 83 percent stake in the bank. The rating reflects Fitch’s belief in the likelihood of government support should the bank come under stress, due to the bank’s important social function of providing microloans as well as the dominance of state resources in MCB’s funding structure. The rating is constrained by the Uzbekistan government’s sovereign risk profile.
The stand-alone rating reflects MCB’s small size, comfortable capitalization, limited sources of funding yet relative stability of this funding, narrow franchise, high concentration of borrowers, fast growing loan-book, and certain weaknesses in the bank’s operating environment. Upside for the rating is limited but Fitch believes that a longer track record and continued consistent credit quality would be positive, while significant credit losses and reductions in capital ratios would lead to a downgrade.
MCB was established in 2006 when the Uzbek government reorganized the state-run Tadbirkorbank with the objective of promoting the development of microfinance services, especially in rural areas. MCB offers subsidized and commercial credit with rates from 5 percent to 14 percent to clients seeking small loans. Informal moneylender rates in Uzbekistan can be up to 120 percent. Approximately 60 percent of MCB’s portfolio is in the agricultural sector. Uzbekistan has the fourth largest population in Eastern Europe and Central Asia and thus has one of the largest potential client bases for microfinance services, however significant government intervention has hindered the development of the microfinance sector. An array of regulations and restrictions on MFIs pertaining to interest rates, loan sizes, disbursement, and a borrower’s legal and social status exist. Directed credit programs and the role of banks in tax collection have discouraged banks from attracting deposits. Additionally the government’s role in determining lending criteria and the development of financial products has generally prevented the development of efficient financial intermediation.
MCB currently operates 79 branches and 270 mini-banks throughout Uzbekistan servicing over 60,000 borrowers and nearly 170,000 savers. According to MIX Market, the microfinance information clearinghouse, as of December 31, 2007 MCB reported total assets of USD 118.6 million, a gross loan portfolio of USD 65.6 million, an ROE of 8.6 percent, an ROA of 4.1 percent, and a debt to equity ratio of 0.98. As of December 31, 2008 MCB reported a gross loan portfolio of USD 113.1 million.
Ratings by mainstream rating agencies such as Fitch and Standard and Poor’s (S&P) are beginning to become more prevalent in the microfinance industry as the sector has grown and attracted the attention of more investors. As reported by Microfinance Insights, MFI stakeholders, institutional investors, fund managers, and emerging market specialists all identify the need for a globally accepted set of metrics which would allow comparisons between microfinance investment opportunities as well as with non-microfinance opportunities. In 2007 S&P developed a global credit rating framework to address this need. According to Christian Novak, Executive Director, Morgan Stanley Fixed Income “based on our experience in intermediating debt financing for MFIs, a global scale rating – by a mainstream rating agency such as S&P – available to investors helps them with their investment decisions”. Ratings also allow investors to meet their own regulatory requirements regarding eligible investments. The benefits to MFIs include a wider investor base, lower borrowing costs, and the ability to benchmark themselves versus their peers.
By Laura Anderson, Research Associate
Additional Resources:
Fitch Ratings: Home
Morningstar: Fitch Rates Uzbekistan Microcreditbank at B-
The MIX Market: Mikrokreditbank Profile
The MIX Market: Central Asian Benchmarking Report, 2006, February 2008
The MIX Market: Microfinance Institutions in Central Asia: Benchmarks and Analysis 2005, November 2006
Asia Development Bank Technical Assistance Consultant’s Report, June 2008: Uzbekistan: Implementation and Monitoring of Policy Reforms in the Agricultural Sector
Standard and Poor’s: Financial Institutions, Microfinance
Microfinance Insights, July 2008: Mainstream Credit Ratings Promote Microfinance in its Efforts to Become a New Emerging Market Asset Class
Microfinance Insights: Home
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