Asset and Liability Management for Deposit-Taking Microfinance Institutions
Even the most mature microfinance institutions (MFIs) need to pay attention to their balance sheet to manage financial risks. Risk management helps determine the appropriate balance between risk and reward. As MFIs diversify their funding sources, sound asset and liability management (ALM) is critical to help MFIs asses and manage financial risk.
By examining the structure of the balance sheet, MFIs can identify, measure, and manage financial risks—risks arising from the mismatch of asset and liability currencies (foreign exchange risk), maturities (liquidity risk), and repricing (interest rate risk). Once these risks have been identified and measured MFI managers can decide what level of risk is acceptable and set limits to maintain asset and liability mismatch at an appropriate level given the organization’s risk appetite and growth and profitability targets.
This Focus Note gives an overview of these risks and pays special attention to how they apply to deposit-taking institutions.