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> Posted by Madeleine Dy, Program Specialist, CFI
The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.
Effective risk governance is critical for the growth and sustainability of an MFI, and board members play an important role in overseeing, monitoring, and controlling institutional risks. Governing Banks: MFI Edition, the latest publication of the Center for Financial Inclusion’s Running with Risk project, is a comprehensive risk and governance manual that follows a newly appointed director of an MFI bank on his journey to acquire the understanding and skills needed to meet the unique challenges of his role. Through the different characters the director meets, including the Chair of the Board, CEO, and Chair of the Risk Committee of the Board, the author Karla Brom holds a candid, educational, and easy-to-read conversation. She discusses a multitude of topics, including best practices in determining board composition, risk management roles and responsibilities, and risk appetite.
Governing Banks: MFI Edition builds on the work of the Governing Banks supplement created by IFC’s Global Corporate Governance Forum, and modifies the document to take into account the specifics of regulated microfinance institutions. For the MFI Edition, valuable input and oversight were provided by an advisory team comprised of Lauren Burnhill of One Planet Ventures, David Risser of NestorAdvisors, Mike Lubrano of Cartica Capital, Keith Waitt of Consultancy Matters, and Deborah Drake of the CFI. The publication is the third output of the Running with Risk project, which seeks to raise awareness about the importance of effective risk governance for institutional growth and sustainability. The first two publications were Microfinance – A Risky Business and Ten Risk Questions for Every MFI Board.
> Posted by Christian Ruehmer, Independent Consultant
The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.
Being a board member of an MFI is challenging. As MFIs are evolving, board members face an ongoing stream of strategic questions, and more technical expertise and specific knowledge about financial products are becoming necessary. As an MFI grows, employees and stakeholders have increasingly high expectations for board members.
The challenge for the board member is to be a coach as well as to control the management, and to stay engaged despite the fact that the MFI is always changing.
Risk management is one changing area. Risk management is no longer just a small function hidden in the finance department. More risk types are becoming relevant including such “exotic” categories as reputational and legal risk. In addition, increased integration into countries’ financial systems also means a higher exposure to interest rate and liquidity risk, and increased awareness by the regulatory authorities.
How can board members play an active and useful role for the MFI that faces such challenges?
1. Stay Engaged or Increase Your Involvement in the MFI
The MFI might look different than when the board member joined, but this is not a reason to back off. More sophisticated MFIs require stronger involvement and personal commitment. The board member should spend more time with the MFI, participate in more meetings, pay visits to the institution, and test the products the MFI is offering. One suggestion is to organize social gatherings, including dinners, around the time of board meetings and invite selected employees to join. If well organized, such gatherings promote information exchange and a better understanding of the tasks and responsibilities on both sides.
> Posted by Andrea Horak, Program Coordinator, CFI
The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.
You may have caught Philip Brown’s blog post last month on how MFI boards can be explicit about risk strategy and appetite. Philip’s post was one of 10 responses collected for the publication, in which industry experts each candidly responded to one tough risk question that every board member should be asking, and be able to answer. The publication, Ten Risk Questions for Every MFI Board, was officially released today.
Through the publication, we set out to cover topics such as over-indebtedness, risk management measures, fraud, “newer” risks, and lack of communication, offering insight on some of the most difficult risk issues that board members face. Ten Risk Questions for Every MFI Board provides concrete warning signs and strategies for effectively managing or avoiding specific risks. We hope this resource will empower board members to speak up when they are uncomfortable about a move the MFI is making, or when they think an early warning sign of a larger problem may be present.
The publication is part of the Center’s Running with Risk project, which seeks to raise awareness about and enable effective risk governance for the institutional growth and sustainability of MFIs. Running with Risk is creating a common framework and language around risk so both the MFI’s management and board of directors better understand the potential of their roles, and can more adequately anticipate and manage risks. In Ten Risk Questions for Every MFI Board, the various experts discuss the importance of boards in determining and assessing how much risk is acceptable for the MFI and taking responsibility in leading the institution to ensure that the proper policies, procedures, and people are in place.
> Posted by Philip Brown, Managing Director Risk, Citi Microfinance
The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.
It may not be explicitly articulated and may be just “what we do” but all MFIs have a risk strategy and risk appetite. Board members have a responsibility to become active shapers of their organizations’ risk strategies and appetites, so that they can guide their institutions into waters of appropriate depth.
Each board member brings different perspectives to the table, but collectively, the board needs to have a view on the key macro and micro entity and performance risks and their possible impact on the MFI. At a high level these risks can be broken down into strategic/business model risks (clients, products, and delivery channels), operational risks (i.e., how the MFI functions), financial risks (funding, liquidity, FX risk), and compliance risks (adherence to regulations, client code of conduct). However, setting and monitoring risk strategy and appetite is not a checklist exercise. There are some on-going broader risk guidance principles that boards might utilize as part of being explicit about risk strategy and appetite.
Set Risk Culture/Tone at the Top:
Risk management is about managing MFI performance against expected performance. Boards represent shareholders and stakeholders who have an established view on the MFI’s expected performance and business and risk boundaries. This view is evidenced in plans, guidelines, minutes, and the focus of on-going board agendas. New investors, who signify change, can alter this consensus around expected future risk, profile, and performance. In any event the view of risk is dynamic. Market vagaries and operational performance will inevitably require on-going risk profile adjustments to strategic, operational, financial, and compliance risks, and lending models. This degree of risk tolerance, “how we operate,” will trickle-down throughout the entire institution from the board to the management to individual, daily staff decisions.
>Posted by Kirsten Hansen
Risk. This four-letter word was prominent in the major headlines last week,
as legislators met with the CEO of JP Morgan to discuss the company’s 2 billion dollar losses. Why had JP Morgan taken such enormous risk? Why had JP Morgan’s risk management strategies failed to prevent the risky trades?
In times of financial crisis, risk is an easy scapegoat. The financial institution took on too much credit risk. Interest rates on the company’s liabilities rose unexpectedly. If risk were fundamentally bad, the obviously solution would be eliminating all risks. But, as outlined in a recent Harvard Business Review article, for every financial institution there are always risks that a company actually chooses to take on in order to generate returns, and which are well encapsulated in the idiom, “Nothing ventured, nothing gained.” Since such strategic risks can’t be eliminated but are an essential part of the pursuit of returns, such risks must be carefully managed to maximize potential gains and minimize potential losses. Read the rest of this entry »
>By Danielle Donza
My mother is a risk expert. Even now, when she walks into a room, she sees the choke-able object on the floor, the sharp corner of the coffee table, and the window open just enough for a baby to fall out. Sometimes I think she sits around all day dreaming up every risk her children could possibly face, no matter how absurd, and figuring out how she can prevent it. Some would call this paranoia, but some might call it risk management.
Whether it’s childrearing or MFI oversight, risk management is tricky business. It requires identifying plausible risk scenarios, deciding which risks are actually worth focusing on, understanding what you can do to mitigate them, and finding a balance so growth and development aren’t (too) negatively affected. And, for MFIs, it requires reaching consensus among board directors and management on an acceptable level of risk, and then complying with regulations, especially if taking deposits. Mom had a hard enough time getting Dad to agree, and comply.
In the Center’s recently released “Microfinance – A Risky Business ,” David Lascelles, senior fellow and joint founder of the Center for the Study of Financial Innovation, shares his insights about risk in a lively and provocative manner. He discusses some of the most important risks that boards should consider and highlights the importance of managing risk at all times, not just during crisis. In fact, effective board oversight of risk should help to anticipate and avert crises. Read the rest of this entry »
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