Shifting Technical Assistance Needs for Commercial MFIs: A Focus on Risk Management Tools

This paper notes that in recent years, microfinance institutions (MFIs) have been shifting away from their reliance on donor financing and transitioning to commercial funding sources such as client deposits and loans from commercial banks and private investors. With such funding come more stringent repayment schedules and higher costs-of-funds, exposing an MFI to additional risks such as liquidity risk, interest rate risk and often exchange risk. The paper suggests that given the NGO and development roots of most MFIs, they are often unfamiliar with these risks and the techniques to manage them. It argues, however, that MFIs can utilise expertise and tools from formal financial institutions that are constantly developing and updating their risk management techniques.

Banyan Global has developed a risk management framework that involves identifying, measuring, limiting and monitoring risks. These risks include financial risks associated with matching interest and exchange rate exposure as well as liquidity and operational risks. The framework involves active asset liability management, liquidity management and internal audit. It also incorporates stress testing as a tool to manage these risks.

The paper states that regulators, raters, and increasingly donors and MFIs themselves are requiring that MFIs pay greater attention to the financial risks that they take. The purpose of this paper is to share the major findings of Banyan Global’s risk management research with the microfinance community, to explain how liquidity, interest rate and exchange rate risk can impact an MFI’s business, and to introduce practical tools and techniques which MFIs can use to measure, limit and monitor these risks. The paper notes that the techniques presented are not comprehensive but rather designed to advance the discussions surrounding microfinance risk management.

  • Resource type
  • Author Powers, J
  • Year of Publication2005
  • Region
  • LanguageEnglish
  • Number of pages15 pp.
  • EditionBanyanGlobal Learning Series

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