Microfinance - A Risky Business: A Time for Strong Leadership

Evaluating the potential of strong governance in mitigating microfinance risk
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This paper focuses on the role of MFI governance in handling risks. It states that risk management and oversight is essential all the time, not just during crises. Effective board oversight of risk should help to anticipate and avert crises. The paper explains why practitioners and experts believe that MFI boards must take their role in risk governance very seriously. This paper is the first output of the Running with Risk project that seeks to raise awareness about the importance of effective risk governance for institutional growth and sustainability. Key points include:

  • Microfinance is no longer a low-risk business;
  • MFIs need to have a strong leadership to manage risk;
  • MFI risks include conventional risks such as bad debts and operational problems, as well as new risks such as exposure to markets, and to new technology;
  • Strong governance is important to get a troubled MFI back on its feet;
  • MFIs with strong governance have a board with the independence to ensure that the institution operates soundly and effectively;
  • Tasks of governance include setting a risk strategy, understanding risks, and monitoring and controlling risk.