Institutionalising Risk Management for MFIs- –Framework and Challenges

This briefing note sets up a framework for risk management in microfinance institutions. The note states that:

• Risk Management (RM) involves the identification, measurement, monitoring and management of an institutions risk within a robust, proactive and integrated framework;
• RM helps an MFI to avoid exposure to risks that are not essential to its core business, and to reduce exposure to risks that are inherent to business;
• Institutions seeking to adopt RM should address:
  • Overnight shifts;
  • Policies;
  • Scope of actively managed risks;
  • Action focus;
  • Extent of involvement.
• A well-structured ‘Risk Management Program (RMP)consists of strategies, structure, processes and infrastructure;
• The ‘RM Function of an institution should be domiciled in the internal audit department and the risk management committee;
• Instituting effective RM requires a strong internal audit function. The internal audit:
  • Assesses the effectiveness of risk identification;
  • Evaluates appropriateness and conformity of risk responses to the institutions policies;
  • Reviews management of key risks;
  • Evaluates the monitoring and reporting of risks.

The note concludes by describing the challenges that institutions face while setting up effective RMPs. These include challenges in the areas of strategy, structures, processes and infrastructure.