1. idg mfi risk jan 27

www.nimbusconsulting.net, Email: [email protected]

Financial Risk for MFI’s

Phnom Penh, CambodiaJanuary 27, 2010

Presented By: Nandan S. BishtDirectorNimbus Consulting, India

http://www.nimbusconsulting.net/


Nimbus Consulting Private Limited is management consulting company based in India with specialization in management solutions in IT, Audit, Accounting, Internal Control, Risk Management, Financial Management, Financial and Legal Structuring, Risk Management, Process Mapping and Improvement.

INTRODUCTION



INTRODUCTION

Financial Risk

Financial risk is normally any riskassociated with any form of financing.Risk is probability of unfavorablecondition; in financial sector it is theprobability of actual return being lessthan expected return. There will beuncertainty in every business; thelevel of uncertainty present is calledrisk.


http://en.wikipedia.org/wiki/Risk

http://en.wikipedia.org/wiki/Finance


MFI’s Special Features

MFI’s an Offshoot from NGO sector / activities

Risks due to specialized operational activities and products

Low Capital Base, heavy dependence on debts funds

Typical nature of assets of an MFI



MFI’s Special Features

Typical Nature of Liabilities of an MFI

Low Capacities of MFI’s Staff

Low Technological Absorption

High Growth Expectations



Risk Factor

Risk

Mitigating Risk

Most of the MFI’s of the present day world are offshoot or have genesis in the social development

Improperly developed or non-aligned vision, mission of the organization resulting in lack of good commercial sense for decision making and day to day functioning.

Professionally handled transformation stages i.e. from NGO activities to commercial microfinance. Adequate training and capacity building efforts by MFI’s

MFI’s an Offshoot from NGO’s!



Risk Factor

Risk

Mitigating Risk

Small loans in cash, large volume of customer

and transactions

Unsecured nature of loans

Stress on internal control and monitoring mechanism,

i.e. control and monitoring become inadequate to cope

with huge no. Of small cash transactions.

Recovery of distressed, irregular or NPA becomes

difficult due to non-realizable security or collateral i.e.

Credit Risk

Well researched products in debt and savings.

Use of banking channel for disbursement and

collections i.e. product structured or technology used

to reduce cash handling i.e. ATM vending machines

etc.

Operations or product related !



Risk Factor

Risk

Mitigating Risk

Portfolio expansion is based on long term

debts ( refer snapshot -1)

Low capital-equity base and resulting in high

financial gearing i.e. credit default risk, reputation

risk.

Ever dependence on debt funds for expansion.

Small time debt non-availability results in serious

implication for MFI portfolio.

More equity based funding sources to be crated,

i.e. more Micro-finance investment vehicles (

MIV) need to be created nationally or

internationally preferable with private-public

participation.

Low Capital Base, heavy dependence on Debt !



High Debt Equity Ratio of MFI’s In Cambodia in last 4 year

Source: Mix Market Information

Low Capital Base, heavy dependence on Debt !

Snapshot: 1



Risk Factor

Risk

Mitigating

Risk

Loans of small value distributed to large number

of people, where such people mostly operating

in un-organization sector i.e. small vendors,

farmers, SME’s with irregular cash flow.

Recovery of irregular and overdue loan is difficult

due to small value, unrealizable security and

week regulatory environment i.e. recovery risk

Portfolio susceptible to cyclical, seasonal, natural

and other calamities.

Participation / co-operation with insurance

companies resulting in creation of a partnership for

mutual benefit whereby microfinance clients get

access to insurance services, MFI secures its loans

and insurance company get to the bottom of the

pyramid.

Nature of Assets of an MFI !



Risk Factor

Risk

Mitigating

Risk

Mainly long term debts with low innovation in

debt products

High cost of financing the loan portfolio i.e. market risk

In few case savings with unpredictable withdrawals

trends

Plain debt products not allowing MFI the flexibility in

financing matching their typical needs and requirements.

( i.e. securitizations, partnership with big banks missing

examples in India)

Innovative method of financing the micro-

finance portfolio needed like securitization of

existing loan portfolio, partnership with big

banks and financial institutions as successfully

experienced in India.

Nature of Liability of an MFI !



Risk Factor

Risk

Mitigating

Risk

Most of the MFI’s have low training quotients

resulting in low capacities.

Low capacities of staff i.e. both relating to staff

with client’s responsibilities and information

processing and analysis in back office results

in inadequate information processing and

decision making information.

Increase training efforts, information sharing

and developing of association like CMA for

information exchange, trainings and capacity

building.

Low Capacities of MFI’s staff !



Risk Factor

Risk

Mitigating

Risk

Though providing services akin to banking sector still lagging far on technologic absorption

Making it difficult to cut down on cost, thereby

making ultimate services to clients costly.

Needed support for fast expansion is missing

resulting in compromised control and monitoring

mechanisms.

Experimenting with latest technology and methods

, developing new service delivery channels like

use of mobile banking, creating partnership with

existing delivery channels like partnering with post

office network etc.

Lower Technological Absorption !



Risk Factor

Risk

Mitigating

Risk

High growth expectation from high growth potential.

Year on year growth in Microfinance portfolio for last 4

year has been around 100%, in Cambodia most of the

MFI grown at more than 50% (see the snapshot 2)

High growth expectation results in undue strain on

the existing systems and resources and thereby

creating sub-optimal service delivery.

Avoidable competition and unfair practices by MFI.

Developing fair practice code at MFI association

level i.e. CMA.

Supporting the development and sharing

information for

High growth expectation from sector !



Year to Year Growth of gross loan portfolio

High growth expectation from sector !

Source:

Mix Market

Snapshot: 2



Liquidity Risk

Currency Rate Risk

Interest Rate Risk

Due to gap in maturity pattern ( i.e. timing ) of assets and liabilities of MFI’s

Due to fluctuation in currency rate resulting in gap

between foreign currency assets and liability

Due to fluctuation in interest rate charged by

lenders and resulting in low interest margin.

Nature wise specific risk for MFI’s!



Risk Factor

Risk

Mitigating

Risk

High gap of assets and liability maturity time buckets,

bullet payments of debts, over dependence on debts

Liquidity risk i.e. High gap of cash or maturity

pattern of assets and liability resulting in inability of

MFI to met expansion demands and honour

lenders repayment schedules.

Better AML Process in the Microfinance

Institutions, better negotiated debts products,

increase in capital base of the MFI.

Liquidity Risk for MFI’s



Risk Factor

Risk

Mitigating

Risk

Dealing in multi-currency, external borrowing and

micro-finance portfolio being in different currencies.

Currency risk results in foreign exchange loss i.e.

Due to value of foreign currency assets being less

than foreign currency liabilities.




Currency Risk for MFI’s



Risk Factor

Risk

Mitigating

Risk

Interest being charged by lenders being flexible or

benchmarked to other standard rate i.e. Libor or Sibor

though no changes in interest rate of MFI portfolio over

the period of the loan.

Interest Margin is reduced resulting in operating

loss to MFI’s




Interest Rate Risk for MFI’s



Thank you !

Nandan S. BishtDirectorNimbus Consulting Pvt. Ltd.Email:

[email protected]


mailto:[email protected]

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1. idg mfi risk jan 27