Microfinance W9

Risk Management

Risk

• possibility of something bad will happen

• this can be controllable or uncontrollable

• things will go unplanned

• any outcome that is uncertain.

Risk Management

measurement and the control of risks (expected & unexpected changes) in order to price the investment correctly and to reduce losses determined by changes in future events or outcomes

Why does risk management matter in MF?

1. more complex as it offers diverse products and services

2. need for sustainability

3. growing competition because some traditional banks also approach the customers like MF

4. ethical responsibility as they’re willing to take a risk that’s why the interest rate is high

Taxonomy of Risks

Business Risk

1. Specific Risk

2. Generic Risk

   • risk comes from the microfinance activity itself

   • example of this: nasira yung equipment, hindi nagbayad yung customer mo

Financial Risk

1. Liquidity Risk

2. Credit Risk

3. Market Risk

   • risk that comes from how you manage your money

   • example: don’t have enough cash

Process Risk

1. Operational Risk

2. Residual Risk

   • risk that comes from how you run your microfinance business

   • example: problem within the organizational structure or staffing

Specific Risk

• product

• low level of standardization in terms of

  1. geographical context

  2. beneficiaries

  3. product and services

Generic Risk

• environment (broader sense)

• location and development policy:

  1. financial policy

  2. fiscal policy

  3. regulatory policy

  4. juridical environment

Business Risk Management

• Single project - small MFIs with one branch

  1. provisions for future losses

  2. risk sharing

• MFIs - multiple branches

  1. provisions for future losses

  2. portfolio diversification - lend different borrowers in different location

  3. risk sharing

LIquidity Risk

• risk of not having enough cash on hand to meet your obligation

• causes:

  1. expected changes - predictable

  2. unexpected changes - unpredictable

Credit Risk

• risk that borrowers won’t repay their loans

• types:

  1. expected loss - average amount of loss that is expected to have

  2. unexpected loss - risk is higher than expected

Market Risk

• risk that changes in the market that will negatively impact your finances

• types:

  1. interest rate risk

  2. currency risk

Liquidity Risk Management

1. Single Project Approach

   • simpler cash flow

   • focus on timing

   • limited options

2. Pool of Funds Approach

   • more complex cash flow

   • balancing act

   • more tools

Credit Risk Management

1. Single Loan

2. Loan Portfolio

CRM - Single Loan

1. EL

   • creditworthiness analysis:

     • qualitative credit

     • scoring models

   • risk sharing

2. UL

   • monitoring process risk transfer

CRM - Loan Portfolio

1. EL

   • creditworthiness analysis

   • portfolio size

   • risk sharing

2. UL

   • monitoring process

   • portfolio size

   • portfolio diversification

   • risk transfer

Market Risk Management

1. Micro-Hedging - smaller projects

2. Macro-Hedging - larger MFIs

Operational Risks

1. internal factors

   • process

   • people

   • system

2. external events

   • legal risks

   • coup d’etat

   • others

Residual Risks

• external events not included in operational risks:

  1. catastrophic risks

  2. terrorist risks

  3. reputational risks

Process Risks Management

1. Auditing Procedures

2. Risk Sharing

Hedging

risk management strategy to offset losses in investments by taking an opposite position in a related asset