Key note presentation_amfiu conference

Microfinance Risk Management:
Current Status in Uganda
Managing risks – a critical challenge for MFI sustainability
Forensic. Advisory. Fraud.www.summitcl.com
Mustapha B. Mugisa’s Keynote address
AMFIU Annual Conference and AGM
20th – 21st June 2013
Hotel Africana.

Forensic. Advisory. Fraud
What do you think is the
impact to the economy
when a business collapses?
What happens when that
particular business is a
microfinance?
Imagecredit,
ACFE.com
Why care?
#1
#2

Keynote Agenda…
1. Perspective
2. Current status
a) Regulatory
b) Governance
3. Way forward A low-end business woman with
merchandise.
Credit: Internet photo.

Perspective…
Case 1: The rise and fall
of SOMEDI Microfinance.
• Started in 1996, in
Masindi
• Expanded regionally.
• Was no more by 2012

Perspective… impact
Joseph Businge,
who used to
own three
shops, lost it all.
He now lives in
poverty in
Masindi
• Lost donor goodwill
• Lots of people lost
livelihood
• Bad reputation of the
industry

Perspective… why collapse?
• Poor governance
• High levels of fraud
• Lack of shared
strategic focus

Perspective…
Case 2: The rise and fall of
Victoria Basin Savings &
Microfinance Cooperative
Trust Ltd (VBS).
• Started in 1990, in Rakai
as building society
• Transformed into a
SACCO.
• Off the radar by 2013!

Perspective…impact.
9,854
active
borrowers
in 2005
56%
women.

Perspective… why collapse?
Case 2: VBS Microfinance
• High levels of fraud
• Failure to manage
change
• Poor governance

Perspective… lessons
• Timely
supervision
• Effective risk
management

Status of Microfinance RM…
1. Perspective
2. Current status
a) Regulatory framework
b) Governance
3. Way forward

(a) Regulatory
framework is key
“Majority of the players
are outside the formal
regulation.”

Who is regulating who?
T a b le 1 : C u rre n t s ta tu s o f th e M ic ro fin a n c e in d u s try in U g a n d a
T ie r C a t e g o r y o f
I n s t it u t io n s
R e g u la tio n N u m b e r
T ie r 1 B a n k s B a n k o f U g a n d a ; F in a n c ia l In s titu tio n s A c t
2 0 0 4
2 4
T ie r 2 C re d it In s titu tio n s 4
T ie r 3 M ic ro fin a n c e D e p o s it-
T a k in g In s titu tio n s
B a n k o f U g a n d a ; M D I A c t 2 0 0 3 4
T ie r 4 M F Is a n d S A C C O s T h e C o m p a n ie s A c t, 1 9 6 1 4 9
T h e N G O ( A m e n d m e n t) A c t 2 0 0 6 8 1
F o r S A C C O s , th e R e g is tra r o f C o o p e ra tiv e
S o c ie tie s ( M T IC ) u n d e r th e C o o p e ra tiv e
S o c ie tie s A c t C a p 1 1 2
2 ,0 6 5
In fo rm a l: n o c le a r re g u la tio n fo r o th e r
s a v in g s a n d c re d it s c h e m e s lik e s a v in g s
a n d c re d it s c h e m e s in s e v e ra l c o m p a n ie s .
U n k n o w n
O th e r M o n e y le n d e rs M o n e y le n d e rs A c t, C a p 2 7 3 , 1 9 5 2 5 3
S o u rc e : A M F IU p u b lic a tio n s .

Regulatory framework…
Should address the
key failings:
• Avoid mission drift
• Address fraud risk
• Monitor key
business indicators

• MoPED provides policy
and oversight of the
financial sector through
Rural Finance Services
Program (RFSP)
• Department of
Cooperatives in MTIC
registers & supervises
SACCOs
AMFIU and
UCSC provide
support to
members as
self regulating.

• Tier 4 regulatory
framework underway
• SACCOs to be classified
• Large ones to be under
prudential regulations,
e.g. under amended
MDI Act
Clear
definition of
‘large” or
“small”
SACCOs to be
specified.

Microfinance is a
business for social
impact and economic
return. It supports the
people at the bottom of
the pyramid to change
their lives in a
sustainable way.
Risk is the
probability
that an
investment‘s
actual return
will be
different
than
expected

“Microfinance is not about making
a lot of profits or becoming a
bank. It is about expanding scale
and capacity to extend very low
cost microloans to as many poor
people as possible and enabling
their enterprises to grow”,
Mustapha B. Mugisa, 2013.

The need for regulation…
Case 3: Enter Promotion of
Economic Transformation &
Realization of sustainable
Livelihood (PEARL)
microfinance
• Started in July 2006
• Expanded rapidly
• Voluntarily closed in
2013.

The need for regulation…
• Lots of changes in the
industry
• Both SACCO and non-
SACCO institutions
• New dynamics e.g. money
transfer, microcredits via
mobile money and mobile
savings = more complex!

(b) It is all about
Good Governance.
Fact: risk management
is not structured in
many microfinances.

Status on ground…
• Best practices are just on
paper
• There is the “Board”,
“Auditors”, etc… but these
are for cosmetic
purposes
• Institutions want to just
be ‘seen’ to be ok because
they have the “Board.”

Status on ground…
• Risk management is
not structured.
Majority of staff don’t
know their roles in
risk management!

Status on ground…
• Generic risks exits e.g.
“credit”, “liquidity”,
“technology”,
“governance.”
• Few people, if any, know
how those risks are
identified, assessed,
managed and
continuously reviewed

Status on ground…
• Although cases of
SOMEDI, VBS and PEARL
have shown fraud, IT &
staff are big challenges,
few institutions have
recognized this. Why?

Forensic. Advisory. Fraud
“An average
organization loses
about 5% of its
annual revenue to
fraud”, ACFE Report
to The Nations 2012.
Total annual revenue (all
Uganda banks) in 2011
1.94/- Trillion
Ugx. 4
billion annually!
ACFE Uganda survey in
2011 revealed banks &
telecoms lose 15-25% of
annual revenue to fraud!
Average cost of fraud to
each bank in Uganda
#1: Lots of fraud in the sector…

#2: Cyber threat & ICT
security risks
Your
Institution
Virus & Hacker
Attack
Data Leakage &
Network Abuse
Cyber Crime
Combat
Quality
Demand from
Clients
35%
65%
For institutions
65% of security
breaches are internal
35% of security breaches
are external.
You need tools to ensure real
time network monitoring?

#3: The people risks…
• Information theft
• About 2/3 leaving
employees steal data
• Microfinance IT system
frauds; e.g. salami
techniques; loan write-
offs, etc.

The way forward…
1. Perspective
2. Current status
a) Regulatory
b) Governance
3. Way forward
A low-end business woman with
merchandise.

XY Microfinance RM model…
Case 4: XY Microfinance risk
management model is good.
• Risk management is part of
their business
• Process owners identify the
risks and monitor them
• Eight questions are asked
and answered

XY RM model… awareness
#1: Do the Board, management and staff all
understand how the risk register is developed?
F ig u r e 1 : R is k m a n a g e m e n t p r o c e s s a t X Y
1 . I d e n tify
 W h a t c o u ld g o w ro n g ?
2 . A s s e s s
 H o w lik e ly is it to h a p p e n ?
 W h o w o u ld c o m m it fra u d ?
 W h a t w o u ld b e th e im p a c t
if it h a p p e n e d
3 . C o n tr o l/ M itig a te
 W h a t s h o u ld b e d o n e to
re d u c e th e ris k ?
 W h o o w n s th e ris k ?
 W h a t m o re to d o a b o u t it?
4 . M o n ito r a n d
C o n tin u o u s R e v ie w
 A re th e c o n tr o ls e ffe c tiv e ?
 H a s th e ris k c h a n g e d ?
X Y O b je ctive s/
K R A s

XY RM model… tone at the top
#2: Is the Board involved in
risk management?
XY ensures a right tone at the
top throughout the RM process.

XY RM …impact/likelihood
#3, for each identified event, are
likelihood and impact clearly defined
and assessed by process owners?
XY uses the likelihood and impact
guide by the Institute of Risk
Management (IRM), specifically
follows the ISO 31000:2009
guidelines as in tables 2 & 3 below.

XY RM model…likelihood
R a t in g S c o r e T h r e a t O p p o r t u n ity
F re q u e n t 5  > 7 5 % c h a n c e o f o c c u rre n c e
 V e ry re g u la r o c c u rre n c e
 Fa v o u ra b le a n d fre q u e n t o c c u rre n c e
lik e ly.
L ik e ly 4  > 5 0 % < 7 5 % c h a n c e o f o c c u rre n c e
 C irc u m s ta n c e s fre q u e n tly
e n c o u n te re d
 Fa v o u ra b le o u tc o m e is lik e ly to b e
a c h ie v e d in o n e y e a r.
 M o re th a n 5 0 % c h a n c e o f o c c u rre n c e .
P o s s ib le 3  > 2 5 % < 5 0 % c h a n c e o f o c c u rre n c e
 L ik e ly to h a p p e n a t s o m e p o in t in
th e n e x t 2 y e a rs .
 C irc u m s ta n c e s o c c a s io n a lly
e n c o u n te re d .
 R e a s o n a b le p ro s p e c ts o f fa v o u ra b le
re s u lts in o n e y e a r.
 2 5 % to 5 0 % c h a n c e o f o c c u rre n c e
U n lik e ly 2  > 5 % < 2 5 % c h a n c e o f
o c c u rre n c e
 O n ly lik e ly to h a p p e n o n c e in 3
y e a rs .
 C irc u m s ta n c e s ra re ly e n c o u n te re d .
 S o m e c h a n c e s o f fa v o u ra b le o u tc o m e
in th e m e d iu m te rm
 5 % to 2 5 % c h a n c e o f o c c u rre n c e
R e m o te 1  L e s s th a n 5 % c h a n c e o f
o c c u rre n c e .
 H a s n e v e r h a p p e n e d b e fo re
 C irc u m s ta n c e s n e v e r e n c o u n te re d .
 L e s s th a n 5 % c h a n c e o f o c c u rre n c e .

XY RM model…impact
R a tin g D e fin itio n M o n e ta r y
I m p a c t
( U g x ’m )
C o n s e q u e n c e I m p a c t o n
X Y ’s
o b je c tiv e s
R e p u ta tio n p e r
e v e n t
N o n c o m p lia n c e
5 V e r y h ig h
( c a ta s tr o p h ic )
> 5 0 L e a d s to
te r m in a tio n o f
p r o je c ts o r
w ith d ra w a l o f
fin a n c in g a n d is
u n d a m e n ta l to
s e r v ic e d e liv e r y
N o n
a c h ie v e m e n t
o f o b je c tiv e s ;
p e r fo r m a n c e
fa ilu r e
M a x im u m h ig h
h e a d lin e
e x p o s u r e ; B o a r d
c e n s u r e ; lo s s o f
c r e d ib ility
S e r io u s w ilfu l
b r e a c h ; c r im in a l
n e g lig e n c e o r a c t;
p r o s e c u tio n ; B o a r d
c e n s u r e .
4 H ig h ( C ritic a l) > 1 0 < 5 0 E v e n t w h ic h m a y
h a v e a p r o lo n g e d
n e g a tiv e im p a c t
a n d e x te n s iv e
c o n s e q u e n c e s
S ig n ific a n t
d e la y s ;
s ig n ific a n tly
u n d e r ta r g e t
H e a d lin e p r o file ;
r e p e a te d
e x p o s u r e ; B o a r d
in v o lv e m e n t;
r e g u la to r y
e n q u ir y
D e lib e ra te b r e a c h o r
g r o s s n e g lig e n c e ;
fo r m a l in v e s tig a tio n ;
d is c ip lin a r y a c tio n ;
B o a r d in v o lv e m e n t
3 M o d e ra te > 5 < 1 0 E v e n t w h ic h c a n
b e m a n a g e d , b u t
r e q u ir e s a d d itio n a l
r e s o u r c e s a n d
m a n a g e m e n t
e ffo r t
M a te r ia l
d e la y s ,
m a r g in a l
u n d e r
a c h ie v e m e n t
o f ta r g e t
R e p e a te d n o n
h e a d lin e
e x p o s u r e ; s lo w
r e s o lu tio n ;
P a r lia m e n ta r y
e n q u ir y / b r ie fin g
N e g lig e n t b r e a c h ;
la c k o f g o o d fa ith
e v id e n t; p e r fo r m a n c e
r e v ie w in itia te d
2 M in o r > 0 .5 < 5 E v e n t c a n b e
m a n a g e d u n d e r
n o r m a l o p e ra tin g
c o n d itio n s
I n c o n v e n ie n t
d e la y s
N o n - h e a d lin e
e x p o s u r e , c le a r
fa u lt s e ttle d
q u ic k ly ;
n e g lig ib le im p a c t
B r e a c h ; o b je c tio n /
c o m p la in t lo d g e d ;
m in o r h a rm w ith
in v e s tig a tio n
1 I n s ig n ific a n t < 0 .5 C o n s e q u e n c e s c a n
e a s ily b e
a b s o r b e d u n d e r
n o r m a l o p e ra tin g
c o n d itio n s
L ittle im p a c t N o n - h e a d lin e
e x p o s u r e , n o t a t
fa u lt, n o im p a c t
I n n o c e n t p r o c e d u ra l
b r e a c h ; e v id e n c e o f
g o o d fa ith ; little
im p a c t

Impact x likelihood = risk…
X Y R is k in d e x = im p a c t x lik e lih o o d
IMPACT
5
4
3
2
1
5 1 0 1 5 2 0 2 5
4 8 1 2 1 6 2 0
3 6 9 1 2 1 5
2 4 6 8 1 0
1 2 3 4 5
1 2 3 4 5
L I K E L I H O O D
S c o re R is k m a g n itu d e
2 0 - 2 5 M a x im u m
1 5 - 1 9 H ig h r is k
1 0 - 1 4 M e d iu m r is k
5 – 9 L o w r is k
1 - 4 M in im u m ris k
#4, Are risks
identified and
managed?

Figure 2: XY’s risk universe
Risk
Universe
Strategic
Financial
Compliance
Procurement
frauds
Fraud
Over
indebtednessLiquidity
Asset
misappropriation
Non Compliance
to statutory
requirements
Dynamic legal
regime / Non
compliance to
Best practices
Non
compliance
to internal
policies
‘Unclear’
Strategic
focus
Mission drift
Corporate
governance
Inadequate
Succession
planning
Ineffective
change
management
Poor
Client
management
Stakeholder risks;
concealment of
Malpractices
High staff
turnover
Gaps in
compliance
enforcement
Operational
XY’s risk universe
www.summitcl.com. © 2013 All rights reserved.
Reputation Risk
Unclear
Performance
Indicators
Governance
constraints – low
Anti-fraud
funding
Fraud.
Compromise
of XY
Credit /
fieldStaff
Weak contract
Management
Information
Technology
Poor change
management
Poor IT security
practices
Weak
IT system
securityHigh
System
downtime

XY’s risk control strategy…
F ig u r e 3 : R is k I m p a c t/ L ik e lih o o d c o n tr o l
1
5
L ik e lih o o d
P o s t
c o n tr o l
P re co n tro l
4
3
2
1
2 3 4 5
1
1
2
2
3 4
3
##
4
55
Im p a ct
XY’s strategy is
to move risks
from the red
category to the
Green one, on
an on-going
basis…

XY RM …risk reporting
#5, are risk reporting processes effective?
R o le Q u a rterly S em i A n n u a l / A n n u a l
 u ltim ate a cco u n tab ility an d o v ersig h t
fo r b u sin ess risk an d co n tro ls .
 receiv e a ssu ran ce th at risk
m an ag e m en t is w ith in p o licy.
 R eceiv e p erio d ic rep o rts fro m A u d it
C o m m itte e a n d rev iew all risk s in red
categ o ry.
 A p p ro v e th e R isk M an ag e m en t
S trateg y.
 “to p 1 0 ” risk list.
 su m m ary d ash b o ard .
 p en d in g litig atio n .
 m ajo r in tern al an d ex tern al ev en ts .
 au d it assu ran ce .
 O v erse es d ev elo p m en t,
im p le m en tatio n an d m ain ten an ce o f
risk m an ag e m en t acro ss th e A u th o rity.
 risk p ro file .
 self assessm e n t.
 lo ss ev en t d ata .
 stress testin g .
 k ey risk in d icato rs.
 To p 1 0 strateg ic risk s.
 To p risk s o f th e d ep artm en ts.
 au d it assu ran ce .
 effectiv en ess o f risk m an ag e m en t.
 co st / v alu e o f risk m an ag e m en t.
 b en ch m ark in g risk m an ag e m en t.
 o w n risk s.
 d esig n an d o w n co n tro ls..
 ru n th e b u sin ess
 risk p ro file .
 self assessm e n t.
 lo ss ev en t d ata .
 stress testin g .
 k ey risk in d icato rs.
B o a rd
A u d it/R isk
C o m m ittee
D ep a rtm en t /
S ectio n h ea d s

XY RM …risk appetite & KRIs
#6, has the board set and communicated
risk appetite?
R is k c la s s B o a r d / S M T / m a n a g e m e n t le v e l a r t ic u la t io n o f r is k
a p p e t it e .
S t r a t e g ic 1 ) Z e ro to le ra n c e o f a c tiv itie s n o t w ith in th e C o m p a n y ’s
b u s in e s s p la n a n d s tra te g ic o b je c tiv e s .
2 ) V e ry L o w ris k a p p e tite fo r re p u ta tio n a l ris k s
3 ) Z e ro to le ra n c e fo r d is c lo s u re o f c o n fid e n tia l o r c l a s s ifie d
in fo rm a tio n .
C o m p lia n c e 1 ) Z e ro to le ra n c e fo r n o n - c o m p lia n c e
F in a n c ia l 1 ) Z e ro to le ra n c e fo r fra u d u le n t / th e ft a c tiv ity b y a n y s ta ff,
c u s to m e r o r s ta k e h o ld e r
O p e r a t io n a l 2 ) L o w ris k a p p e tite fo r in a d e q u a te ly tra in e d ,
in e x p e rie n c e d a n d u n s k ille d s ta ff.
3 ) L o w o p e ra tio n a l ris k a p p e tite fo r a n y in te rn a l p ro c e s s
fa ilu re s .

XY RM …top 10 risks
#7, are top 10 risks identified and
clearly monitored?
XY has operates a risk management
software which provides a dashboard
or a Risk Register for easy risk
monitoring on-going.

XY RM …risk reporting
#8, Is the Risk Register up to date?
XY has operates a risk management
software which provides a dashboard
or a Risk Register for easy risk
monitoring on-going.

Address ICT security…
Train all computer users in
comprehensive ICT security
• 96% of your staff are not
IT secure aware
• They are a weakest link

Focus on fraud management…
SCL fraud prevention toolkit
i. Fraud risk management
strategy –e.g. PAPEMO toolkit &
on-going awareness training to
all staff
ii. Effective whistleblowing solution
Microfinance fraud prevention
Toolkit

Call to Donors & Government
• Donors must become business
partners; provide support beyond
enabling outreach and focus on on-site
capacity building
• Government must fast track the law
for regulating Microfinance Institutions
• GoU should take advantage of existing
institutions like AMFIU and UCSU

Our values for your success!
We take pride in
doing the right
thing, rather than
what is right for the
profitability of SCL.
For more info, visit:
www.summitcl.com
www.mustaphamugisa.com
m: 0712 984 585.
Thank you!

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