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> Posted by Lynn Exton, Managing Partner, Exton & Partners Risk, Governance & Analytics LLP
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With the benefits of digital financial services (DFS) for enhancing financial inclusion now widely accepted, many microfinance institutions (MFIs) have or are planning to add new digital products to their delivery channels. But just because the benefits of DFS are relatively straightforward doesn’t mean the calculus behind whether or not institutions should take the digital plunge is. Institutions encounter practical challenges when adopting DFS, like big up-front investments in resources, the need for buy-in from staff and management, and the necessity for clients to change their behavior and adopt new technology. As with any new product, DFS also can introduce a wide range of risks to the MFI.
The Digital Financial Services Working Group recently released its newest publication, entitled, “The Digital Financial Services Risk Assessment for Microfinance Institutions – A Pocket Guide.” The guide was developed to assist MFIs in understanding the risks and corresponding mitigation strategies associated with DFS as well as to support institutions in choosing among the diverse business models available for providing these services. The DFS Working Group is a virtual community of practitioners and organizations developing knowledge management products promoting inclusive finance.
> Posted by Joshua Goldstein, Principal Director for Economic Citizenship & Disability Inclusion, CFI
The extent of the reciprocal relationship of trust between an employer and employee may be hard to measure, but it may be more indispensable to good governance than a variety of risk management tools. In fact, there are organizations that forego some traditional risk management mechanisms, instead emphasizing the power of trust. One example, according to Andrew Ross Sorkin, writing in DealBook, is Berkshire Hathaway, the American multinational conglomerate that’s currently the fifth-largest company in the United States.
The normative route to good governance encompasses a host of practices including risk management functions, internal auditing, and board committees. A MIX project examining the practices of over 150 MFIs across 57 countries found a positive correlation among institutional governance indicators, suggesting that good governance practices don’t exist in isolation. Putting such watch-dog measures into place, however costly, is increasingly standard practice at institutions both public and private around the world. Without these, who knows what some employees might be tempted to do. It is the price of doing business. Or at least that is the common school of thought.
> 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.
Making the case for more attention to risk management and governance in both the financial inclusion sector and corporate world can be an uphill battle, but McKinsey’s Global Survey findings provide some strong reinforcement. If we let the numbers speak for themselves, they tell an interesting story. Their survey of 772 corporate directors showed that although over 90 percent of respondents reported that their boards have become more effective over the past five years, risk management still surfaces as the biggest difficulty faced by boards.
The survey shows that board directors have improved their knowledge on various company issues since the last survey conducted in 2011. More specifically, about one-third say they have a complete understanding of their organization’s current strategy, as compared to about 20 percent in 2011. However, only 15 percent can say the same for the risks their company faces. In fact, the reality is that 30 percent of directors reported they have limited to no understanding of the risks facing their company.
You might ask why there is such a difference. The answer lies in the time directors spend on the two topics. Directors responded that they spend more time on strategy than any other area, 28 percent compared to only 12 percent for risk management. This clearly shows where their priorities and attention are focused. McKinsey mentions that companies and boards are becoming more complacent about risks as the 2008 financial crisis becomes a more distant memory — unfortunately fading memories do not translate to fading risks. Read the rest of this entry »
> 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.
> Posted by Madeleine Dy and Danielle Piskadlo, Program Specialist and 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.
It’s heating up—maybe not in terms of the weather but certainly in terms of growth and competition for many microfinance institutions (MFIs). And as growth and competition rapidly increase in many countries, there are many potentially serious risks and impacts that MFIs need to take into account. As we have seen in the crises in Andhra Pradesh, Nicaragua, and Morocco – to name a few – microfinance is risky business, and it can be argued that many industry failings result from poor risk management and oversight. It might also be fair to say that risk management didn’t garner much attention before because times were good, but now, as more markets heat up, it is important that we learn from past mistakes, and focus the necessary resources to implement preventative risk management measures.
To provide MFIs with the risk management resources needed to help tackle this challenge, we are excited to announce that Risk Management was recently added as a “Hot Topic” on the Microfinance Gateway! The risk management resources now available through the Microfinance Gateway were compiled by a dedicated team of Credit Suisse Virtual Volunteers¹ in coordination with the newly established Risk management Initiative in Microfinance (RIM)², which was created to raise awareness as well as develop best practices and appropriate standards for risk management in microfinance globally.
> 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.
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