Mf Trainingsept08

7/28/2019 Mf Trainingsept08

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Bank of Lao PDR and Asian Development Bank

INTRODUCTION TO RISK MANAGEMENT

OBJECTIVES:

A. TO REVIEW AND UNDERSTAND THE GENERAL AREAS OF RISK FACING MFIsAND HOW MICROFINANCE INSTITUTIONS SHOULD MANAGE THESE RISKS

B. TO REVIEW AND UNDERSTAND THE SPECIFIC RISKS FACING MFIs WHO AREGRANT RECIPIENTS

C. TO DISCUSS AND AGREE THE RISK MITIGATION STRATEGIES IN EACH RISKAREA USED IN TRACKING, ASSESSING, AND OVERCOMING ISSUES ARISING

Session 1: TO UNDERSTAND THE GENERAL AREAS OF RISKFACING MFIs

Objective: to review and understand the various risks facing MFIsTime: 50 minutesMaterials: Blank poster paper

Handout 1 (Risks facing MFIs)Preparation: Have materials ready

Process / Topics for discussion

A. Introduction (10 minutes)

Outline objectives and confirm all understand and agree to these (if not then discuss andreview).

A quick introduction and discussion on institutional-levels risks will start the training, butthis serves to contextualize the workshop only. Confirm focus of training is on how bestto deal with risks facing microfinance institutions who are receiving grants, and not onpractitioner-level risk management


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A: Basic functions of management: Management operates through various functions, oftenclassified as planning, organizing, leading/motivating and controlling.

Planning: deciding what needs to happen in the future (today, next week, next month,next year, over the next 5 years, etc.) and generating plans for action.(What to do?)

Organizing: (Implementation) making optimum use of the resources required to enablethe successful carrying out of plans.

Staffing: Job Analyzing, recruitment, and hiring individual for appropriate job. Leading/Motivating: exhibiting skills in these areas for getting others to play an

effective part in achieving plans.(To make individual work willingly in the organization) Controlling: monitoring -- checking progress against plans, which may need

modification based on feedback.

B. Risks that microfinance institutions face (20 minutes)

1. ask participants what risks microfinance institutions need to deal with, and write up onposter paper. List all these and discuss which are the main ones, and which can begrouped together (10 minutes)

Note: The 7 main areas of institutional-level risks facing MFIs are in the areas of:i. Credit Riskii. Liquidity riskiii. Market riskiv. Operational riskv. Interest risk,vi. Foreign exchange risk, andvii. Environment Compliance & Regulatory risk

2. Circulate Handout 1 which outlined these risk areas, and ask participants to review (5minutes)

3. Ask participants if any risk areas in handout not listed, or any risk areas from discussionnot in handout, and discuss (5 minutes)

C. How do microfinance insti tutions manage these risks? (20 minutes)

1. ask participants how they think microfinance institutions manage risk. Discuss riskmanagement, covering following points:

Microfinance institutions manage risk in various ways. Go through the list fromhandout 1 and discuss how microfinance institutions can and do manage risks in

h f th li t d
http://en.wikipedia.org/wiki/Planhttp://en.wikipedia.org/wiki/Plan


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Ask participants what is the PURPOSE OF RISK MANAGEMENT?Answer: from a

financial institutions perspective, the purpose of risk management is to:

protect the institution from losses (minimize the downside to the MFI); attract capital; and instil confidence in regulators.

Explain to participants that all financial institutions should strive to inculcate a RiskManagement Philosophy in their institutions. This is that risk management is aboutproactively managing an institutions business. This approach should be ingrainedat all levels of management and reflected in an MFIs processes and procedures.

Risk management should not be viewed as merely a defense mechanism. Rather, bytaking a prudent and pro-active approach to financial management, an MFI not onlylimits its risk and potential losses, but also reaps benefits by attracting more(commercial and other) capital, at less cost, and by preserving and improving itsgood standing with rating agencies, regulators and depositors.

For a risk management process to be successful it must be flexible, open, andupdated regularly. This is to ensure the assessment of risk level and allocation of

resources remains relevant.

Assessing risks: it is important to note that microfinance institutions face differentrisks over time, and that the levels of risk change. Efforts and resources should beaimed at those risks that are:a. more likely to occur: so have a high probability;b. risks that will have a biggerimpact on the microfinance institution

it is important to keep in mind that an MFIs corporate bylaws and resolutions specifywho has authority to take actions on behalf of the institution. These action and signingauthorities impact many financial decisions and need to be incorporated into the design


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operating level: ensuring that individuals with the right capabilities are hired, carefullydrawing clear lines of responsibilities, and ensuring that the magnitude of risks isadequately addressed. Management must build the boards confidence in its capacity to

implement these policies. Again, communication is keyallowing managers to identifyand address the MFIs risks. Finally, when the MFI is managed by a small number of keymanagers, key person risk exists and proper segregation of duties becomesimperative.

In practice microfinance institutions manage risk in various ways, such as: Planning: This includes longer-term strategic and business plans (3 to 5

years), annual business plans, activity and workplans. The detail of these

plans will need to relate to the complexity and scale of the microfinanceinstitution. Monitoring progress against plans: this means having the information

(often refered to as management information systems or MIS) to track datathat will enable progress against the plan to be monitoried. MIS and DataCollection is a key ingredient in managing risk. Beyond opencommunications and identification of risks, an institution must make sure ithas good management information systems (MIS) and datacollection/tracking. Particularly in the case of financial risk management,MFIs should focus on gathering information to monitor progress against itsplans and tracking them over time. Tracking these data helps withestablishing risk-comfort levels and anticipating future risks; and later itenables an MFI to model volatility scenarios and test the sensitivities offinancial projections to varying factors:

Interest rate movements Foreign exchange rate movements Core deposits

Foreign exchange trading volumes (to provide insight into the liquidity offoreign exchange and access to it)

Trading of securities (to help determine the liquidity of investments).Good MIS is key to data collection and risk management measuring, monitoring,and reporting, and cannot be over-emphasized. Especially given theenvironments in which microfinance institutions operate, they are particularlyvulnerable to operational risks/disruptions, and safeguarding information takes onincreased importance. Further, sensitizing projections to stress scenarios

requires having sound and long term historical data on which to baseassumptions. External auditing: independent advice to the highest governance body in

the microfinance institution, to management, to regulatory and to consumers.This is mainly to ensure that the financial position of the microfinanceinstitution is transparent.I t l dit f ti


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regulatory requirements by BoL (discuss what these are and the risk, costand other implications) Portfolio at risk levels (PAR)

The level of operating expenses will influence the minimum cash holdingsfor safety cushion purposes

Ask participants if they consider the MEASUREMENT OF RISKS AND LIMITSimportant, and if so why. Answer: Risk Management can be considered as aframework of alarms for re-evaluating risks, creating action plans in advance of thecrisis, and requiring management discussions if risk exposures surpass establishedloss tolerance and trigger levels. Any sound risk management system needs to have

established limits for risk exposure. Stress testing scenarios help determine theselimits, by testing how far market or other risks can deteriorate and still be absorbedby the financial institutions profit and loss statement without jeopardizing thebusiness. For example the institution needs to assess how many months of losses itcan sustain.


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Session 2: TO REVIEW AND UNDERSTAND THE SPECIFIC RISKSFACING MFIs WHO ARE GRANT RECIPIENTS

Objective: to review and understand the specific risks facing MFIs who are grant recipientsTime: 50 minutesMaterials: Blank poster paperPreparation: Have Operations Manual & Annexes ready to in digital projector


A. Risks to MFFMU (20 minutes)

Q. ask BoL participants what they see as the major risk areas relating to provision of grant fundsto MFIs. Specifically. what is the largest risk facing the MFFMU, BoL and ADB with regard theprovision of grants?

A. The grant recipient microfinance institution collapsing! The risk of the microfinanceinstitution failing would result from one or more of the risk areas discussed in session 1 arising.

This could well occur if risk management is sufficiently in place, such as when: Risks are not identified and assessed (e.g. the microfinance institution does not have a

plan in place, and/or does not track progress against the key milestones in this plan) Risks areas are not tracked (e.g. the microfinance institution does not know its

delinquency or PAR) A plan is in place to deal with the risk (e.g. succession planning for the CEO, or access

to sufficient liquidity reserves should there be an issue Immediate implementation of action plans takes place when risks materialize (e.g. clear

roles and responsibilities for who is accountable for each risk area identified, and whatthey will do should the level of risk in the relevant area increase)

Q. What other risks are faced by the MFFMU? List on a poster sheet and discuss.?????

Q. What can and does the MFFMU do to ensure risks especially of the microfinance institutionfailing are minimised? List on a poster sheet and discuss.

Answer: The MMFU has/will: Eligibility criteria in place to limit risk (see Grant Fund Operations Manual sections V.)

if time discuss these and how these relate to risks facing microfinance institutions. Established an application process to verify that grant recipients are eligible (see Grant

Fund Operations Manual section VII.) This includes providing training in the use of theG t F d O ti M l d i thi i k t t i i if ti di


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Discuss with BoL team each of the eligibility criteria for the Grand Fund, focusing on thereasons why each of them were established in terms of managing risk.

Remind participants that to qualify for grant funding, MFIs must:1. be in operation for at least six (6) months;2. be registered with the Bank of Lao PDR, or in the process of registration;3. have at least two full-time paid staff, or have a plan to do so within the next six (6) months;14. contribute matching capital at least equal to the amount applied for;5. have staff capable of preparing regular and periodic financial statements in accordance with

BOL requirements;6. submit a business plan for a minimum period of two years that demonstrates that the MFI:

a. will reach a point of full cost recovery i.e. total income (less any grant income) exceedstotal expenses

b. will have sufficient staffing, management and governance structures in place to provideprofessional services and be institutionally sustainable

c. provides financial services to the poor2, which may include loans, savings accounts,microinsurance, transfers, etc.;

d. is committed to adopting microfinance best practices to expand services to households,micro and small enterprises.

7. Comply with the Microfinance Decree of the Lao PDR (22 June 2005) and the recentlyapproved regulation for deposit-taking, non deposit-taking MFIs and Savings and CreditsUnions dated 18 June 2008.

8. Demonstrate competency and good record keeping9. Provide names of major shareholders, directors and employees together with evidence of

capacities and qualifications10. Facilitate a site visit by MFFMU designed to examine all transactions to date and interview

the MFIs client-beneficiaries (if required).

11. Provide full access to files and accounts.

To ensure that the partner MFIs are compliant with the above criteria, remind the participantsthat this risk from the MFFMU is managed through the due diligence process:

Add in here the Risk Assessment Format (Annex 5)


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Session 3: TO DISCUSS AND AGREE THE RISK MITIGATIONSTRATEGIES IN EACH RISK AREA USED IN TRACKING, ASSESSING,AND OVERCOMING ISSUES ARISING

Objective: to discuss and agree the risk mitigation strategies in each risk area used intracking, assessing and overcoming issues arising

Time: 40 minutesMaterials: Poster paper with blank Risk Assessment Matrix sheet

Blank poster paperPreparation: Have Operations Manual & Annexes ready to in digital projector


Obtain participant ideas on risk categories an mitigation strategies use blank Risk AssessmentMatrix on poster / flipchart (40 minutes).

a. Ask participants to list Risk & Potential Impact (first column)b. For each Risk area identified, discuss and agree likelihood / consequence / risk levelc. Then for each Risk area identified, discuss and agree treatment to mitigate that risk aread. For each Risk area, discuss and agree action to be taken if the risk occurse. Determine who is responsible for each Risk area identified.f. Add any comments / notes if relevant

Remind BoL that a decision needs to be taken as to whether a visit to the MFI grant applicant isneeded in order to undertake and institutional assessment, to ensure and confirm the applicantdetails and capacity, and to verify capacity is in place to fulfil plans and milestones outlined in

application. In particular such an institutional visit would be undertaken to:- Assess the management, board, and governance of the MFI. This would include

discussion to verify that the business plan is understood and that there is the necessarycommitment to it. This would also include an assessment to ensure that the MFI has agenuine commitment to serving the needs of low income clients..

Assess the capacity of staff to implement the business plan and to perform the activitiesplanned by the MFI

Discuss the MFIs loan portfolio performance, methodology, and management, in order

to obtain information to support the grant analysis and financial decision. Obtain a clear justification of the use of funds. Identify risks and propose solutions to mitigate risk of operations Undertake a generic financial assessment (could use WEAL financial monitoring tool

here), including a review of historic financials, financial forecasts, and any competitiveadvantage of the MFI. A review of the financial management, internal control and MIS

t ld f i t l t f thi N t th t thi t ld d t i


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Annex 5: Risk Assessment Matr ix Format

Catalyzing Microfinance for the Poor Project (JFPR 9095)

No

Risk and potential impact Likeli-hood

Conse-quence

Risklevel

Treatment to mitigate risk Action to be taken if occurs Responsibi lity

1 Example: Mis-use offunds/corruption

2 Example: Microfinanceinstitution collapses

3 Example: MFIs dont report to

BOL4 Example: MFIs lose BOL license5 Example:

External/environmental issues(e.g. inflation, disasters)

6 Example: MFIs are not pro-poororiented

7 Etc.8 Etc.

910111213

Determination of ri sk levels:

Consequence

Low (L) Medium (M) High (H)

High (H) Moderate Extreme Extreme

Medium (M) Low High Extreme

Likelihood

Low (M) Low Moderate High

Reviewer:

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