Paper

Four Risks that Must be Managed by Microfinance Institutions

How to minimize the four risks that are often faced by MFIs?
Download 4 pages

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.