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> Posted by Amanda Yap, Research and Communications, PlaNet Finance
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.
Before the advent of the People’s Bank of China’s county-level pilot program to create microcredit companies (MCCs) and village and township banks (VTBs), there was a large number of unbanked individuals and micro-entrepreneurs whom commercial banks were unwilling to serve. Hence when the pilot program to create MCCs, the product of a financial inclusion plan by the Chinese government, went into action in 2005 the number of MCCs boomed, and in the past few years they have mushroomed to an astounding number of 9,000 as of 2013. The Chinese financial sector has been plagued with corruption in the past few years – for example, the Wu Ying private lending network scandal and the Qilu commercial bank forgery in Shandong. To circumvent corruption and maintain control of the increasingly overpopulated sector, regulators enforce strict capital requirements and caps on interest rates. However, these requirements are stifling the operational sustainability of these MCCs. Joe Zhang, author of the book Inside China’s Shadow Banking: the New Sub-prime Crisis? writes, “The regulation is killing the dynamism of the sector. Everyone in the sector is working extra hard to make a modest return (after huge expenses and bad debts).”
Should 9,000 MCCs all be painted with the same regulatory brush?
Some industry leaders believe a rating system for microcredit companies is the answer. Liu Ping, Director General of the Senior Advisors of the People’s Bank of China, believes ratings can be a yardstick to measure the sustainability of microcredit companies and differentiate the good apples from the bad. MCC investors hope that high grades based on credible ratings could move the authorities to loosen restrictions on outlets, so that business costs could be better covered, individual company branches could grow, and the sector could eventually be made more sustainable. Conversely, low rating grades would expose institutions with questionable practices that require operational changes. In addition, a ratings system may change the popular perception that these institutions are “loan sharks”, leading to increased investment, institutional growth, and client outreach.
> 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 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 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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