The Future of Risk Management in Microfinance: Perspectives from Practitioners in the US Financial Markets

This paper tracks the growth of microfinance and predicts that microlending will develop a similar structure as that of the U.S. mortgage market. This will create new risk management challenges and the need for market governance in the industry. Similarities between the two markets include:

• Increased funding from capital markets;
• High degrees of competition and fragmentation;
• Large losses due to diffused risk ownership.

But, with critical safeguards in place, microfinance need not go the sub prime way. Instead, its transformation can align with the sector’s original promise. To manage risk effectively, the microfinance industry needs to:

• Build on its elemental strengths;
• Draw on the creativity, good practices and lessons of failure from the formal financial sector;
• Preserve its homegrown and unique paradigms for managing risk.

Finally, the potential evolution of the microfinance market will introduce greater complexity, more products and more balance sheet intricacy. Such seemingly harmless evolution can lead to a considerable change in the risk profile of the microfinance business.