A Risk Management Framework for Microfinance Institutions
The tool explores some of the specific challenges and current issues for risk management in MFIs. It looks at categories of risks and says that there are broadly three simple categories:
- Financial risks;
- Operational risks;
- Strategic risk.
It investigates the organizational processes that foster effective risk management. Specifically the paper provides:
- An overview of comprehensive risk management as an approach and its key elements;
- A discussion of the significant risks and challenges facing MFIs today;
- Key principles of effective risk management and describes the risk management feedback loop.
The ten guidelines it identifies for MFIs to follow when applying the principles of effective risk management to their institution are to:
- Lead the risk management process from the top;
- Incorporate risk management into process and systems design;
- keep it simple and easy to understand;
- Involve all levels of staff;
- Align risk management goals with the goals of individuals;
- Address the most important risks first;
- Assign responsibilities and set monitoring schedule;
- Design informative management reporting to board;
- Develop effective mechanisms to evaluate internal controls;
- Manage risk continuously using a risk management feedback loop.
The document discusses the key roles and responsibilities of the board and management to ensure that all tasks are performed and that someone is responsible and accountable for managing each of the major risks and overseeing the overall risk management system. It clearly identifies core obstacles and challenges for MFIs as they shift to a comprehensive risk management framework from the reactive, step-by-step approach, and some of the resources needed to overcome them.
