Microfinance and Risk Management
Banks and financial institutions globally have to comply with a wide range of regulations in accordance with stated standards. Financial and operational risk management is at the core of risk management policy and controls, which are needed to ensure a margin of safety and avoid insolvency.
What is it about microfinance institutions that have, for the most part, excluded them from adopting risk management controls and regulations? First, most microfinance institutions were started as non-governmental organizations (NGOs) or non-profit organizations serving poor clients with microloans. Subsequently, some of these organizations transformed into commercial banks which compliance was determined by local banking regulations, with varying degrees of standards and oversight. To ensure sustainability of microfinance institutions, a risk management framework was developed. As the microfinance industry matures, standardized risk management techniques consistent with International Financial Reporting Standards (IFRS) are being adopted by microfinance institutions.
One approach to risk management focuses on the importance of asset liability management for microfinance institutions (MFIs), particularly those which mobilize deposits. A recent report outlines some basic asset liability tools and suggests resources. The author, Karla Brom, has trained more than 125 MFIs on risk management and worked with 11 MFIs on implementing such policies and procedures.