Microfinance

Risk &
Strategies
Presented by: Shalu Bansal
 Risk
A probability or threat of
damage, injury, liability, loss,
or any other negative
occurrence that is caused by
external or internal
weeknesses, and that may be
avoided through pre-emptive
action.
 Group Activity
Its a group activity.
Each group will consists of 2 students.
Each group will think and share the 2 risks faced by them
in day to day life with group member.
Each group will share the risks faced by them with other
groups.
 Risks Faced by MFIs
Risk is the possibility of an adverse event occurring and
its potential for negative implications to the MFI.
Financial Risks Operational Risks Strategic Risks
Credit Risk Transaction Risk Governance Risk
Liquidity Risk Fraud Risk External Business
Risk
Market Risk Legal Risk
Interest Rate Risk
Foreign Exchange
Risk
Investment
portfolio Risk
Financial Risk
 Credit Risk
Credit risk is the risk to earnings or capital due to
borrowers late and non-payment of loan obligations.
Example: The risk of non-repayment of loan due to the
inability of the MFI to check the client history.
 Group Activity
Duration of the activity is 10 minutes.
It consists of three groups.
Each student will scan the QR code which are pasted on
the walls.
Each group will read and discuss the credit risk
management strategy mentioned in the document.
 Credit Risk Management
Strategies
Well-designed borrower screening
Careful loan structuring
Close monitoring,
Clear collection procedures
Active oversight by senior management.
A routine process for comparing concentrations of credit
risk with the adequacy of loan loss reserves
 Liquidity Risk
Liquidity risk is the possibility of the inability of MFIs to
meet current cash obligations. Liquidity risk could
seriously affect the ability of MFIs to meet savings
withdrawals of clients, meet loan disbursement schedules
and pay back funds obtained for on-lending among others.
 Date Deposits Loan Funding Cash Cash
Inflow Outflow
March 13, +$100 -$100 +$100 -$100
2017
March 15, +$100 +$100
2017
March 17, -$100 -$100
2017
March 20, -$100 -$100
2017
March 24, -$100 -$100
2017
March 27, -$100 -$100
2017
 Liquidity Risk Management
Strategies
Cash Flow Statement: Maintaining detailed estimates of projected cash inflows
and outflows for the next few weeks or months so that net cash requirements can
be identified.
Limit on Amount of Withdrawal: Using branch procedures to limit unexpected
increases in cash needs. For example, some MFIs, such as ASA, have put limits
on the amount of withdrawals that customers can make from savings in an effort
to increase the MFIs ability to better manage its liquidity.
Investment Account: Maintaining investment accounts that can be easily
liquidated into cash, or lines of credit with local banks to meet unexpected needs.
Projection of Future Cash Flow: Anticipating the potential cash requirements
of new product introductions or seasonal variations in deposits or withdrawals.
Market Risk
 Interest Rate Risk

Interest rate risk relates to the uncertainties in the MFIs earnings (or net
margin) due to a change in interest rates on the market. It results from
mismatch in asset and liability repricing characteristics and maturity.
Example, when an MFI uses savings (liability) to finance loans (asset) and
expects that the savings at interest rate of 8% per annum will be available to
finance a loan which attracts an interest rate of 24% thus yielding a spread of
16 points. Where savings clients are likely to withdraw their savings earlier
than expected especially before loan maturity and the MFI will have to borrow
or raise new savings at an interest rate higher than 8%, then we have the
potential for interest rate risk. This will be arising either because of changes
in interest rates or the different maturity period called maturity mismatch.
Date Savings Loan Return
(Interest (Interest
Rate per Rate per
annum) annum)
January 1, -8% +20% +12%
2017

February 1, -10% +20% +10%

2017

March 1, -15% +20% +5%

2017

April 1, 2017 -20% -20% 0

 Group Activity (Jigsaw)
It consists of two groups activity.
First group activity will consists of two groups.
Each student will pic one sheet.
Each group will consists of students who are having same color sheet.
Each group will read, discuss and find out the risk management strategy.
Second group activity will consists of two groups.
Each group will consists of students who are having different color sheet
(equal number of two color sheets).
Each group member will describe his/her risk and management strategy to
group members.
 Interest Rate Management
Strategies
Gap Model
Duration Gap Model
 Foreign Exchange Risk

Foreign exchange risk is the potential for loss of earnings or

capital resulting from fluctuations in currency values. MFIs
often experience foreign exchange risk when they borrow or
mobilize savings in one currency and lend in another.
Example, an Canadian MFI borrows concessional on-lending
funds denominated in US$ and then use it to grant loans in
local currency (CAD). There is currency risk i.e. if the value
(exchange rate) of CAD weakens against the US$, the
Canadian MFI is exposed to currency risk.
 Foreign Exchange Risk
Management Strategies
Due to the potential severity of the downside risk, an MFI
should avoid funding the loan portfolio with foreign
currency unless it can match its foreign liabilities with
foreign assets of equivalent duration and maturity.
Matching of Assets & Liabilities
Use hedging instruments, such as forward or future
contracts.
MFIs with Country of Foreign Foreign
Foreign Operation Currency Currency
Currency Assets/Total Liability/Total
Liability Assets (%age) Liabilities
(%age)
USD US 15% 45%

Euro Germany 25% 20%

Rupee India 40% 20%

Yen Japan 18% 20%

 Investment Portfolio Risk
The investment portfolio represents the source of funds
for reserves, for operating expenses, for future loans or
for other productive investments. Investment portfolio risk
refers mainly to longer-term investment decisions
rather than short term liquidity or cash management
decisions. The risk of losing on the interest over time as
well as the value of the currency is known as investment
portfolio risk.
Operational Risk
 Operational Risk
The risk of loss resulting from inadequate or failed internal processes, people and
systems or from external events.
Transaction Risk: It is a risk that arises on a daily basis in MFIs as transactions are
processed and is triggered by a combination of people, systems and processes.
Transaction risk is particularly high for MFIs that handle high volume of small
transactions daily.
Fraud Risk: Fraud or integrity risk is the risk of loss earnings or capital as a result of
intentional deception by an employee or client or a combination of both. The most
common type of fraud in an MFI is the direct theft of funds through suppression of
savings, repayments and diversion of loans by staff acting alone or with clients.
Legal Risk: Compliance risk arises out of violations of or non-conformance of MFIs
with laws, rules, and regulations, prescribed practices, or ethical standards.
 Operational Risk
Management
Transaction Risk: Using computer systems and
minimizing the number of times data has to be manually
entered reduces the chance and frequency of human
error.
Fraud Risk: Use of preventive measures to reduce fraud.
Importance of client visits to verify branch information.
Strategic Risk
 Strategic Risk
Strategic risks include internal risks such as those from adverse business
decisions or improper implementation of those decisions; poor leadership, or
ineffective governance and oversight; and external risks such as changes in
the business or competitive environment.
Governance Risk: One of the most understated and underestimated risks
within MFIs are the risks associated with inadequate governance or poor
governance structure resulting from poor direction and accountability from
the Board of Directors.
External Risk: External risks relate to uncertainties that are considered
external to the MFIs operations but whose occurrences have significant
effects on the operations and sustainability on the MFI. These risks are:
business environment risk, reputation risk, and event risk
 Group Activity
Duration of activity is 10 minutes.
It consists of three groups.
Each student will pic one folded sheet.
Each group will consists of students with same color
sheet.
Each group will read and discuss the Strategic Risk
Management strategy mentioned in the sheet.
 Quiz
Log in to kahoot.it.
Enter the pin number which is presented on the screen.
Enter your name and answer the questions.
Query?