Four Risks that Must be Managed by Microfinance Institutions
This paper discusses the four common risks that MFIs face, and the ways in which these can be minimized.
The failure of an MFI's bank: This makes the MFI incapable of fulfilling its various obligations, such as paying salaries, meeting expenses, etc. To manage this risk, it is necessary for the MFI to:
- Invest in a safe bank;
- Review the bank annually;
- Involve the management board in the decision of which bank to invest in;
- Deposit funds in more than one institution.
Mismatch between assets and liabilities.
This risk can be minimized by:
- Set up a committee that constantly supervises it;
- Avoid funding long-term loans with short-term liabilities;
- Make sure that there are interest rate adjustments in loans with clients.
The connection to foreign currency:
This occurs when the assets and liabilities of this connection is mismatched. To minimize this risk the MFI could deposit the proceeds of the international bank loan in a local bank to be used as collateral.
Lack in liquidity:
To manage this, the MFI needs to:
- Monitor its monthly cash flow;
- Monitor a select, identified group of liquidity indicators;
- Predict its future cash flow needs;
- Invest excess liquidity in safe and appropriate areas.
The paper concludes that MFI managers should:
- Pay attention to macro-economic and systemic trends;
- Develop strategies to address these to avoid the four risks.