How can microfinance institutions cope with the new risks that come their way?
This paper aims to share the major findings from Banyan Global's risk management research with the microfinance community in order to:
Explain how liquidity, interest rate and exchange rate risk can impact a microfinance institution's (MFI's) business;
Introduce practical tools and techniques that MFIs can use to measure, limit and monitor these risks.
The paper presents techniques that are designed to advance the discussions surrounding microfinance risk management. It draws on Banyan Global's previous experience as a provider of risk management technical assistance and training to MFIs.
The paper concludes by presenting the following key findings:
MFIs affiliated with international networks are more aware of and better manage the risks they face;
MFIs with more rigorous cash-flow analyses and liquidity management often have adequate back-up liquidity sources and lower funding costs;
As MFIs diversify their funding sources, foreign exchange risk can become a significant issue. Traditional hedging tools like forwards and swaps are often not available in the markets in which they operate;
As MFIs mature, their interest rate risk tends to increase, which can negatively affect profitability;
Few MFIs are stress testing their liquidity or the impact interest rate and exchange rate movements have on their businesses.