Risk management involves making educated decisions about how much risk should be tolerated and how to mitigate and manage the risk that remains. Good management will limit risks linked to particular products, services, or transactions. Quantitative methods to identify, monitor, and control the different factors in play can be used to assess risk. Well-executed risk management can help to build credibility in the marketplace and create new growth opportunities. However, if risk is poorly managed, investors, lenders, borrowers, and savers may lose confidence in the organization, funds may dwindle, and the institution may not be able to meet its objectives and may eventually go out of business.

Microfinance organizations face many risks that threaten their long-term viability and sustainability. Disasters and conflict cannot be controlled, but can be prepared for, and their impact minimized. Internal issues, such as credit and liquidity risk, market and pricing, operation, compliance, and legal risks can be managed. Careful screening, monitoring and evaluation, accurate reporting, and a strong credit culture combine to provide the checks and balances needed for successful risk management.

Informed risk calculation allows an institution to assess new market opportunities, ensure existing operations are constantly improved, and deliver competitive, effective goods and services to its customers. This is particularly important to microfinance institutions involved in both financial and social objectives. The challenge is to nurture a culture that rewards good risk management without discouraging risk taking.

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