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?

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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

Credit: Internet photo.

(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 f in a n ce in d u s try in U g a n d a

T ie r C a te g o r y o f

I n s t itu t io n s

R e g u la t io 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 t itu t io n s A c t

2 0 0 4

2 4

T ie r 2 C re d it In s t itu t io n s 4

T ie r 3 M ic ro f in a n ce D e p o s it -

T a k in g In s t itu t io 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 t iv e

S o c ie t ie s (M T IC ) u n d e r th e C o o p e ra t iv e

S o c ie t ie 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 t io 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 t io 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. Credit: Internet photo.


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 re 1 : R is k m a n a g e m e n t p ro c e s s a t X Y

1 . I d e n t ify

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 tro l/ M it ig a te

W h a t sh o u ld b e d o n e to

re d u ce th e r is k ?

W h o o w n s th e r is 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 t in u o u s R e v ie w

A re th e c o n tro ls e ffe c t iv e ?

H a s th e r is k c h a n g e d ?

X Y O b je c t iv e 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 re T h re a t O p p o r tu n ity

F re q u e n t 5 > 7 5 % ch a n ce o f o c cu rre n ce

Ve ry re g u la r o c cu rre n ce

Fa v o u ra b le a n d fre q u e n t o c cu rre n ce

lik e ly.

L ik e ly 4 > 5 0 % < 7 5 % ch a n ce o f o c cu rre n ce

C irc u m s ta n ce s fre q u e n t ly

e n co 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 ch ie v e d in o n e y e a r.

M o re th a n 5 0 % ch a n ce o f o c cu rre n ce .

P o s s ib le 3 > 2 5 % < 5 0 % ch a n ce o f o c cu rre n ce

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 ce s o c c a s io n a lly

e n co u n te re d .

R e a so n a b le p ro sp e c ts o f fa v o u ra b le

re su lts in o n e y e a r.

2 5 % to 5 0 % ch a n ce o f o c cu rre n ce

U n lik e ly 2 > 5 % < 2 5 % ch a n ce o f

o c cu rre n ce

O n ly lik e ly to h a p p e n o n ce in 3

y e a rs .

C irc u m s ta n ce s ra re ly e n co u n te re d .

S o m e ch a n ce 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 % ch a n ce o f o c cu rre n ce

R e m o te 1 L e s s th a n 5 % ch a n ce o f

o c cu rre n ce .

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 ce s n e v e r e n co u n te re d .

L e s s th a n 5 % ch a n ce o f o c cu rre n ce .


XY RM model…impact

R a t in g D e f in it io n M o n e ta ry

Im p a c t

(U g x ’m )

C o n se q u e n ce Im p a c t o n

X Y ’s

o b je c t iv e s

R e p u ta t io n p e r

e v e n t

N o n c o m p lia n ce

5 Ve ry h ig h

( c a ta s tro p h ic )

> 5 0 L e a d s to

te rm in a t io n o f

p ro je c ts o r

w ith d ra w a l o f

f in a n c in g a n d is

u n d a m e n ta l to

s e rv ic e d e liv e ry

N o n

a ch ie v e m e n t

o f o b je c t iv e s ;

p e r fo rm a n ce

fa ilu re

M a x im u m h ig h

h e a d lin e

e x p o su re ; B o a rd

c e n su re ; lo s s o f

c re d ib ility

S e r io u s w ilfu l

b re a ch ; c r im in a l

n e g lig e n ce o r a c t;

p ro s e cu t io n ; B o a rd

c e n su re .

4 H ig h (C r it ic a l) > 1 0 < 5 0 E v e n t w h ic h m a y

h a v e a p ro lo n g e d

n e g a t iv e im p a c t

a n d e x te n s iv e

c o n se q u e n c e s

S ig n if ic a n t

d e la y s ;

p e r fo rm a n ce

s ig n if ic a n t ly

u n d e r ta rg e t

H e a d lin e p ro f ile ;

re p e a te d

e x p o su re ; B o a rd

in v o lv e m e n t;

re g u la to ry

e n q u iry

D e lib e ra te b re a ch o r

g ro s s n e g lig e n ce ;

fo rm a l in v e s t ig a t io n ;

d is c ip lin a ry a c t io n ;

B o a rd 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

re q u ire s a d d it io n a l

re s o u rc 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 rg in a l

u n d e r

a ch ie v e m e n t

o f ta rg e t

p e r fo rm a n ce

R e p e a te d n o n

h e a d lin e

e x p o su re ; s lo w

re so lu t io n ;

Pa r lia m e n ta ry

e n q u iry / b r ie f in g

N e g lig e n t b re a ch ;

la c k o f g o o d fa ith

e v id e n t; p e r fo rm a n ce

re v ie w in it ia 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 rm a l o p e ra t in g

c o n d it io n s

In co 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 su re , c le a r

fa u lt s e tt le d

q u ic k ly ;

n e g lig ib le im p a c t

B re a ch ; o b je c t io 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 t ig a t io n

1 In s ig n if ic a n t < 0 .5 C o n se q u e n ce s c a n

e a s ily b e

a b so rb e d u n d e r

n o rm a l o p e ra t in g

c o n d it io n s

L it t le im p a c t N o n -h e a d lin e

e x p o su re , n o t a t

fa u lt , n o im p a c t

In n o ce n t p ro ce d u ra l

b re a ch ; e v id e n ce o f

g o o d fa ith ; l it t le

im p a c t


Impact x likelihood = risk…

X Y R is k in d e x = im p a c t x l ik e lih o o d

IM

PA

CT

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 co 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 r is k

#4, Are risks identified and managed?

Figure 2: XY’s risk universe

Risk

Universe

Strategic

Financial

Compliance

Procurement

frauds

Fraud

Over

indebtedness Liquidity

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

security High

System

downtime


XY’s risk control strategy…

F ig u re 3 : R is k Im p a c t/ L ik e lih o o d c o n tro l

1

5

L ik e lih o o d

P o s t

c o n tro l

P re c o n tro l

4

3

2

1

2

3

4

5

1

1

2

2

3

4

3

#

#

4

5

5

Im p a c t

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 r te r ly S e m i A n n u a l / A n n u a l

u ltim a te a c c o u n ta b il i ty a n d o v e rs ig h t

fo r b u s in e s s r is k a n d c o n tro ls .

re c e iv e a s s u ra n c e th a t r is k

m a n a g e m e n t is w ith in p o lic y.

R e c e iv e p e r io d ic re p o r ts f ro m A u d it

C o m m itte e a n d re v ie w a ll r is k s in re d

c a te g o ry.

A p p ro v e th e R is k M a n a g e m e n t

S tra te g y.

“ to p 1 0 ” r is k l is t .

s u m m a ry d a sh b o a rd .

p e n d in g l i t ig a tio n .

m a jo r in te rn a l a n d e x te rn a l e v e n ts .

a u d it a s s u ra n c e .

O v e rs e e s d e v e lo p m e n t ,

im p le m e n ta tio n a n d m a in te n a n c e o f

r is k m a n a g e m e n t a c ro s s th e A u th o r ity.

r is k p ro f ile .

s e lf a s s e s s m e n t .

lo s s e v e n t d a ta .

s tre s s te s tin g .

k e y r is k in d ic a to rs .


To p 1 0 s tra te g ic r is k s .

To p r is k s o f th e d e p a r tm e n ts .

a u d it a s s u ra n c e .

e ffe c tiv e n e s s o f r is k m a n a g e m e n t.

c o s t / v a lu e o f r is k m a n a g e m e n t.

b e n c h m a rk in g r is k m a n a g e m e n t.

o w n r is k s .

d e s ig n a n d o w n c o n tro ls . .

ru n th e b u s in e s s

r is k p ro f ile .

s e lf a s s e s s m e n t .

lo s s e v e n t d a ta .

s tre s s te s tin g .

k e y r is k in d ic a to rs .


B o a r d

A u d it /R is k

C o m m it te e

D e p a r tm e n t /

S e c t io n h e a 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 rd / 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 ite .

S tra te g ic 1 ) Z e ro to le ra n ce o f a c t iv it ie 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 t iv e s .

2 ) Ve ry L o w r is k a p p e t ite fo r re p u ta t io n a l r is k s

3 ) Z e ro to le ra n ce fo r d is c lo su re o f c o n f id e n t ia l o r c l a s s if ie d

in fo rm a t io n .

C o m p lia n c e 1 ) Z e ro to le ra n ce fo r n o n -c o m p lia n ce

F in a n c ia l 1 ) Z e ro to le ra n ce fo r fra u d u le n t / th e ft a c t iv 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 ra t io n a l 2 ) L o w r is k a p p e t ite fo r in a d e q u a te ly t ra in e d ,

in e x p e r ie n ce d a n d u n sk ille d s ta ff.

3 ) L o w o p e ra t io n a l r is k a p p e t ite 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!

http://www.summitcl.com/

http://www.mustaphamugisa.com/

Key note presentation_amfiu conference

Business

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