This document outlines key principles of risk and risk management in microfinance, emphasizing the importance of managing credit risk and maintaining portfolio quality. It details a six-step process for risk management, highlighting techniques and internal controls necessary for effective loan tracking and repayment. Additionally, it emphasizes the relationship between product development and risk, as well as the need for robust documentation and monitoring after loan disbursement to ensure sustainability and profitability.

1. Principles of Microfinance Refresher
MODULE 3
Risk,
Risk Management &
Microfinance
Introduction: What is Risk and Risk Management?
Six Steps to Managing Risk
Credit Risk Management
Loan Portfolio Tracking, Product Design, & Loan Policies
Next Steps

2. What is Risk?
Risk involves any situation where there is uncertainty about
what outcome will occur or there are expected losses
associated with a situation.
Microfinance is a risky business and managers need to find a
way of dealing with risks to limit the damages or losses that
their organization might experience.
Flashcard Activity

3. Categories of Risk*
There are four Categories of Risk:
* Adapted from Churchill and Coster (2001)

4. What is Risk Management?
Risk Management is the process of taking calculated risks,
reduces the likelihood that a loss will occur, and minimizes the
scale of the loss should it occur. It includes the prevention of
potential problems, the early detection of actual problems when
they occur, and the correction of policies and procedures that
permitted the occurrence.
Combining the planning and controlling functions of managers,
risk management is an ongoing six-step process.
Flashcard Activity

5. 6 Steps of Risk Management
There are six steps to managing risk for microfinance:

6. Credit Risk Management
Definition
Credit Risk Management refers to the techniques that are applied to
optimally manage the exposure of a financial institution who has lent
money to borrowers. Possible losses include:
● Loss of principal or interest
● Cost of retrieval
● Time
● Inability to help other clients
● Loss of job
● Difficulty securing funding
● And more...
Methods to Manage Credit Risk
● Less financing
● Less control
● Insurance
● Reduce the level of risk activity
● Diversification
● Increase precaution
● Contractual risk transfer
Flashcard Activity

7. Loan Portfolio Tracking
& Portfolio Quality
Loan Portfolio Tracking
An outstanding portfolio refers to the principal amount of loans
outstanding for a particular period. The loan portfolio is the main
product of a microfinance institution. It is important to track the loans
in your portfolio. Loan portfolio management reports should be
compiled to coincide with the installment cycle of loans. You can use
a manual or automated system but it must have this information:
● Loan appraisal and disbursement terms: size, duration,
lending methodology, repayment installments, etc...
● Repayment performance
● Delinquency: amount in arrears, portfolio at risk, ratio,
provisioning, write off, etc...
Portfolio Quality
The main source of earnings for the MFI is its loan portfolio.
Reaching a large number of clients cannot be achieved unless there
is good portfolio quality. It is the MFIs responsibility to instill credit
discipline among its clients.

8. Risk Management &
Product Development
Developing the right product for clients with suitable features can be a
challenge. One of the main factors influencing the credit risk is the
product design. There are two elements to Product Development:
● The product should be designed to suit the needs of the client
● The relationship between product design and credit risk
involves characteristics of the microenterprise market

9. Risk Management &
Post Loan Policies
For several reasons after the loan is disbursed, the MFI must
ensure prompt repayment to maintain the profitability and
sustainability of the institution. There are four areas to review
after a loan is disbursed to ensure prompt and adequate
repayment and avoid risks and delinquency:
1. Documentation
2. Controls
3. Monitoring
4. Prompt Decision Taking

10. Risk Management &
Post Loan Policies
Documentation
Data generation and compilation are paramount but not enough.
Analysis of the data by a sound Management Information System
(MIS) must be put in place. Reports can be generated through
tracking indicators. The MIS must be designed to give early
warning signs as needed.
Controls
Management must put in place adequate internal control
measures in line with the Mission and Vision of the organization.
Such internal controls must be explicit and well documented as a
guide for all employees.
Monitoring
The entire operations of the MFI must be carried out regularly and
specified by internal guidelines.
Prompt Action
Status reports should drive management to take prompt and
necessary steps and actions to forestall any undesirable results.

11. Performance Monitoring
Managers again face the challenge in monitoring performance in the
form of:
● Outreach
● Social Performance
● Financial Ratios
● Portfolio Quality Ratios (to establish profitability/sustainability)

12. Next Steps...
Once you have finished reviewing these slides you may proceed to the
following sections of this Module (if you opened these slides in a
separate window, close out this window or tab and return to MODULE
3 in CourseSites):
•
•
•
Review the Resources
Complete the Journal Reflection and FlashCard Review
Check your understanding with the Self-Review
Note: A PDF version of this slide deck is also available for download
Founded in 1999 as the Microenterprise Development Institute, the Carsey Institute’s
Sustainable Microenterprise and Development Program (SMDP) provides training and
networking opportunities for practitioners in the fields of microfinance, enterprise
development, social enterprise, and community-based and rural development. Over
the past fourteen years, we have trained more than 1,800 practitioners from more than
one hundred countries around the globe. The SMDP offers an intensive professional
training experience with a concentration on program planning and implementation of
client and community inclusive economic development strategies.
http://carseyinstitute.unh.edu/smdp