In simple terms, a Micro-finance Organisation is one that provides of a range of financial services to the demographic placed within the lower income bracket. Under normal circumstances, this section of the population does not meet the general requirements to obtain traditional finance, such as loans from banks.

What is Risk Management?

In business, risk management, is the process of forecasting and evaluating financial risks together with the identifying strategies that avoid or mitigate the negative impact of these risks.

Since micro-finance institutions provide a variety of financial services to a wide spectrum of clients in the lower income bracket (between 1- 6 out of 10 on the Living Standards Measurement scale), and due to the insecure nature of this industry–the pervading perception exists that these institutions are particularly high-risk.

While other financial institutions focus on whether the borrower has enough collateral to cover the loan, microfinance institutions are invested in supporting a wide range of activities that focusses on entrepreneurial success, such as capital for a start-up business or study loans.    For this reason, risk management is and should be an integral part of operations for Micro-finance Organisations.

Risk Management Protocols

With proper risk management protocols in place, a micro-finance institution is able to maintain control and ensure sustainability. It pays to be proactive in this regard, and a bit of planning is essential to the long-term sustainability of an institution. There are various components involved in a comprehensive risk management strategy.

First and foremost, micro-finance businesses need to carefully consider which risks can be managed in and which risks threaten the business. Treading the fine line between manageable risks and negative exposure will determine the sustainability or failure of the institution.

Major risks that impact Micro-finance Institutions include:

  • Financial Risks eg credit risk, liquidity risk, interest rate risk and equity risk
  • Operational risks g. fraud, system errors, catastrophic events
  • Strategic risks e.g. ineffective board and management

MFI’s face various risks, the biggest of all is credit risk. An MFI’s success relies on the management of these risks. This comes down to the following beneficial practices:

  • Tight internal supervision
  • Good internal audit practices
  • Good financial procedures
  • Sound financial risk management
  • Good credit management practices
  • Sound collection strategies


Effective Risk Management Strategies

When it comes down to efficiently managing risk, an organisation should ideally and proactively utilise the following four key steps:

  1. Identify the risks facing the institution and assess their severity (either in frequency or potential negative consequences)
  2. Measure the risks appropriately and evaluate the acceptable limits for that risk;
  3. Monitor the risks on a routine basis, ensuring that the right people receive accurate and relevant information; and
  4. Manage the risks through close oversight and evaluation of performance.

For more insight into effectively managing risk, speak to the experts at Claricent Consulting Services.