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> Posted by Kevin Fryatt, Director, Risk management Initiative in Microfinance (RIM)
“We do not engage in risk management because our CEO tells us that every department should be a profit center.” “Risk management seems useful, but how can we afford to pay for it?” Such industry sentiments have been the norm, I’ve found, in my work at the Risk management Initiative in Microfinance (RIM). These statements and many others like them reflect the reality that the value of risk management and its role within microfinance institutions (MFIs) have not yet fully been realized. As the microfinance industry matures and reaching scale through growth continues to drive the strategies of inclusive financial service providers, ways to create sustained value for their clients and shareholders will be increasingly sought after and explored. Finding ways to create sustained value, however, can often be challenging.
Risk management, if carried out effectively, is one important aspect in creating sustained value. Well-executed risk management derives organizational value by ensuring decision-making is carried out within an agreed-upon acceptable level of risk, ultimately providing greater certainty about returns against double-bottom line objectives through reducing volatility of net income and strengthening its ability to meet necessary social returns. For example, decisions on the acceptable amount of credit risk to accept may impact the amount of future financial losses an institution may suffer (financial return) while potentially impacting the type of clients it is able to serve (social return). If risk management has such a high potential to create sustained value, what then has been standing in the way of MFIs effectively implementing it to date?
Many factors explain the challenges in realizing the full value risk management can provide, and much of which point back to the lack of an appropriate risk management framework. Consider the following key framework characteristics:
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> Posted by Danielle Piskadlo, Senior 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.
What good are industry best practices for risk management if many MFIs don’t have the tools and resources to follow them? Sure, you can state that it is an industry best practice to have a risk committee on your board. And it undoubtedly is important to identify that there is value in applying such a practice. But what use is that really if you don’t examine the underlying reasons why 40 percent of MFIs that responded to a MIX survey said they don’t. Or why 32 percent reported not having a risk manager, and 23 percent said they don’t have an internal auditor – and if they did have either, respondents indicated, “both functions tend to report to the CEO contrary to accepted best practice.”
To address this disconnect between where we are as an industry and where we want to be in terms of risk management best practices is why the Risk management Initiative in Microfinance (RIM) was recently launched. RIM is a collaborative effort of Appui au Développement Autonome (ADA), Calmeadow, the Center for Financial Inclusion at Accion (CFI), Mennonite Economic Development Associates (MEDA), MFX Solutions, Microfinanza, Oikocredit, and Triple Jump to raise awareness about the importance of risk management, and build MFIs’ capacity to more effectively understand and manage risk.
It has been shown time and again that there is no one-size-fits-all solution in the microfinance industry. What works in one region for one MFI could be a disaster in a different region or for another MFI. And risk management is no different. Putting out one set of risk standards would create a divide between those that meet them and those that don’t, and those that are a good fit for them and those that aren’t. Instead RIM is in the process of developing a “risk roadmap” to help MFIs assess where their risk management capabilities currently stand, and to then help them navigate to where they want to be in terms of risk management. This risk model will help MFIs continue to “graduate” to higher levels of risk management capabilities as they grow and mature as institutions. This roadmap will provide the microfinance industry with a flexible resource, appropriate to address the wide variety of risk management challenges MFIs face.
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