Risk Management for MFIs – I

MicroSave's Briefing Note 121 discusses how an MFI can identify and understand the risks that it faces. It focuses on understanding the risk function and its difference from internal audit (IA). It also looks at different types of risks, and explains basic risk terms, risk identification, and risk prioritization. Risk management in microfinance is complex because of the absence of traditional risk mitigation mechanisms, and high volumes of cash transactions conducted in remote locations. Mission-driven MFIs are prone to strategic and political risks that are unique to them and their clients. As MFIs continue to grow and expand, they need to strengthen their internal capacities to identify and anticipate potential risks. The Note states that:

• Risk management is often confused with the internal audit (IA) function, but they have conceptual and operational differences;
• Risk has two key dimensions, namely uncertainty and impact;
• Different kinds of risks that MFIs face include operational risk, credit risk, financial risk, and institutional risk;
• Identification of risks starts with each department listing the risks that it faces;
• The next step is risk assessment, where the MFI prioritizes identified risks according to their frequency and impact.