Microfinance Risks and Indicators



Social Mission RiskQualitative IndicatorsA clear vision statement which includes elements that:Reduces the possibility of Mission DriftEncourages Poverty AlleviationEncourages Financial Empowerment of clientsObserve how the CEO (senior management) takes ownership of the vision statementDoes the MFI conduct a poverty assessment?Does the MFI define its target Market?Has the MFI set an appropriate risk appetite?Does the internal auditor report on loans that might indicate mission drift?Quantitative IndicatorAverage loan amount outstanding Is this ratio growing “too fast”? (two times in one year would be too fast, perhaps 25% per year is too slow)Observe the trend by loan productCommercial Mission RiskQualitative IndicatorsMission Statement:Does it include an element promoting Self SufficiencyDoes management exhibit professionalismAre reports prepared timely, accurately, and with action?Are costs and efficiency a priority?Is there a business continuity plan (BCP)?Quantitative Indicators:Portfolio Yield vs APR by loan productCosts to income ratioROA >0AROA >0Dependency RiskQualitative IndicatorsIs there appropriate engagement with the operations of the MFI from the support organization in terms of:AdviceDonations (which could distort the market)Reporting requirementsCapacity BuildingAn exit strategyQuantitative Indicators% Support (Cash and non-cash donations / operational expenses)OSS vs FSS (without the inflation component, so as to isolate donations in kind and subsidized loans)Credit RiskQualitative IndicatorsVetting ClientsProcess Management and are loan officers and other credit personnel following procedures?Are systems reports prepared timely and accurately?Do Compliance Officers or internal auditors ensure that processes are followed to the letter?Quantitative IndicatorsConsider all asset quality ratios: NPL>30 days past due, Write off Ratio,NPL>30 days + Write off RatioPortfolio aging reportsCompare the “waterfall” effect from one reporting period to another to determine if loans are being collected in the aging buckets.Portfolio Yield vs. APR by productConcentration of risk – observe the 20 largest exposures are not more than 25% of the total loan portfolioFraud RiskQualitative IndicatorsIs there appropriate segregation of duties?Is there a process map distinguishing who does what and when?Does the credit committee work effectively to screen loans?Are staff rotated on a planned basis?Is there an internal auditor?Does she test for fictitious (ghost) loans?Number of law suitsClients suing the MFIMFI suing the clientHow strong/weak is the information system?Are “inputters” also “authorizers”?Quantitative IndicatorsPortfolio at Riskshows increase in delinquency when there is fraud, or may be “perfect” for a whileClient DropoutShows dissatisfaction with some element of the lending process, which could indicate fraudSecurityQualitative IndicatorsScreening of the security individuals upon recruitment for potential issuesQuantitative IndicatorsNumber of fraud casesNumber of clients/staffA high number could indicate overworked staff who might not be able to pay attention to appropriate security issuesNumber of security personnel / staff Amount spent on security (meaning staff, hardware, software, etc.) / total expensesClient dropoutcould indicate that clients are aware of security issuesAsset and Liability RiskQualitative IndicatorsIs there an ALCO and how often does it meet?If savings is a product offered ALCO is strongly recommendedSenior Management level or board level?Quantitative IndicatorsExchange gain or loss Amount of foreign currency debt10% may be acceptable without specific risk mitigation strategiesUse the ALCO schedule to identify months when liquidity is an issue.Consider the Liquidity Ratios:Cash ratio,Savings Liquidity Ratio,Loans to Deposits RatioInefficiency RiskQualitative IndicatorsRefer to indicators above about professional managementAre loan officers adequately trained in lending operations?Does the board have the capacity to exercise effective oversight of the institution?Quantitative IndicatorsAll Efficiency and Productivity Ratios:Portfolio to AssetsCosts to IncomeCost per active clientBorrowers per loan officerActive clients per staff memberClient drop outAverage outstanding loan sizeAverage amount disbursedAverage deposit account balanceAverage deposit account balance per depositorSystem Integrity Risk:Qualitative Indicators:Number of reports which are prepared in Excel outside of the systemSegregate “inputters” from “authorizers” from “reconcilers”?Is the MIS and accounting system backed up frequently and are the backups tested?Is power “conditioned” or supported by UPS (uninterruptable power supply)? Saving may be interrupted or data integrity may be compromised.Quantitative Indicators:The difference between the Gross Loan Portfolio as reported on the Balance Sheet and the Gross Loan Portfolio as reported on the Loan Tracking SystemRegulatory RisksQualitative IndicatorsDo the regulators seem to be influenced by political interference which may influence or enforce restrictive labor laws, usury (interest rate cap) or other policies?Integrity of the regulator can be compromisedAre there regulations which limit the growth of MFIs?Are the standards Microfinance friendly?Are regulatory standards strict or can they be somewhat flexible based on circumstances?Do the regulators understand the nature of microfinance operations?Are the reports submitted to the central bank reliable (from the MFI to the regulator)?How fast can the unlicensed MFIs be located?How timely can the regulators act on the information given to them?Quantitative IndicatorsAre there enough supervisors for Microfinance Institutions?Ideal: Quarterly visits, monthly analytical analysisHow often are the reports prepared timely?Competition RiskQualitative IndicatorsAmount of information that is shared willingly among MFIsThe existence and participation in a credit reporting bureauQuantitative IndicatorsNumber of MFIs in a given geographical area (increasing or decreasing)The size of the dominant MFI in a geographical area, if anyThe portfolio yield or APR disparity among MFIs in a geographical areaDifference between “net profit before donations” and “net profit after donations”Demographic riskQualitative IndicatorsConcentration of MFIs in a given areaQualitative indicatorsPhysical Environment Qualitative IndicatorsDoes the MFI have a disaster recovery plan? How are power outages managed?Is image and brand professional?How fast can you relocate if there was a natural disaster?Quantitative IndicatorsNumber of natural disasters or days of business disruption in a yearMacroeconomic RiskQualitative IndicatorsGovernment monetary/fiscal policyQuantitative IndicatorsGDP (growing, stagnant, declining)Local Currency vs. USD or other external currencyInflation rate ................
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