Developing a standardized approach to risk management: challenges and lessons learned from microfinance risk experts

  • Regis DOCK, MFX Solutions
  • Kevin FRYATT, Risk Management Initiative in Microfinance (RIM) 
  • Georgina VÁZQUEZ, Calmeadow 
  • Ligia Maria CASTRO-MONGE, Microfinance and Risk consultant


Regis DOCK kicked off by highlighting the continued industry focus on new products, funding sources and delivery mechanisms. While the financial crisis led to a stronger focus on social performance and client protection, risk management (RM) remains in the background in the discussions on how to strengthen the microfinance industry. As such, industry wide RM standards and approaches are still not available. He believes the lack of interest in RM among practitioners is due to a lack in understanding of its value and practical tools to implement RM systems. Moreover, even when RM is established, institutions focus on regulatory compliance instead of leveraging risks management to inform strategy.

Georgina VÁZQUEZ presented the experience of the Risk Management Facility (RMF) in Latin America. RMF was established against the background of rapid growth of MFIs, increasing investor need for financial and operational RM, a lack of support infrastructure, and comprehensive and affordable RM tools for microfinance. Moreover, many MFIs did not acknowledge the need of comprehensive RM. The RMF was established to build awareness of, and flexible RM tools. Started in 2009, the five year programme aimed to support 40 Tier II MFIs in Latin America.

Through RMF a comprehensive RM methodology was developed, incorporating credit, liquidity, operational and market risks with practical formats to allow practitioners to use their own data collection systems. Later in the programme, "refresher visits" were introduced to offer continued support. In total 33 MFIs were supported with implementing a RM system (10 of which received "refresher" support) in 15 Latin American countries. Vázquez closed by focusing on why some MFIs assimilate and retain information better, and make better use of resources. She found that the principal success factor was commitment and support of the Board and senior management. However, a skilled and committed RM department is also vital. Similarly, a complete and accurate data base is required to support adequate RM.

Lessons learned were that RM programmes need to be flexible enough to be adapted to a specific context and accompanied by capacity building to the MFI. It is vital to safeguard the "institutional memory" of the MFI. Still, some MFIs continue to fail to see the importance of RM or perceive it as a regulatory requirement. Another weak spot is the interpretation, analysis and translation of risk reports into MFI operations and strategy.

Ligia Maria CASTRO-MONGE shared additional lessons learned from RM in the field. She supported Vázquez' points, indicating that lessons learned in Latin America are applicable to any region in the world. She lamented that despite substantial investments in RM infrastructure, implementation and governance, a RM culture remains absent. Without such a culture, appropriate RM practices will not materialise. She focuses much of her TA visits on linking outcomes of internal audits to daily practice to build an understanding and vision of what risks mean in terms of MFI operations. A particular difficulty in developing a risk culture is a management focus on regulatory compliance instead of improving financial, social and environmental performance. In addition, management often expects one-size fits all, easy solutions and disregards less-obvious, and in particular external, risks. Often there is a need to go back to RM basics before moving into more complex measurement of risk exposure.

Castro-Monge closed her presentation by focusing on two trends. Firstly, ineffective RM leads to inefficiencies, such as disproportionate liquidity levels and declining portfolio quality. Secondly, inappropriate staff profiles can lead to high staff turnover and therefore high operating costs. Finally, she explained that proper RM application can help identify gaps in the market and align product development to client needs. She gave the example of mapping hurricane exposure and branch distribution to identify untapped low-risk clients for a particular MFI.

Kevin FRYATT explained how the Risk management Initiative in Microfinance (RIM) incorporates a wide array of perspectives on RM, making it an effective platform for RM standards development, information sharing and industry cooperation. This allowed the initiative to develop a Risk Management Graduation Model to identify, assess and strategize risks according to the development stage of the MFI.

Fryatt stressed that being in a higher tier does not necessarily mean that RM is handled more effectively; even the biggest MFIs can have insufficient risk-management practices. He continued by explaining how the model can be used to assess the adherence to RM guidelines (appropriate to the tier of the MFI), starting from RM fundamentals (e.g. the Management Information System, internal control, governance and culture), to core risk areas and finally to performance risks. Furthermore, the model can provide MFIs with a future outlook on how to develop their RM system according to their strategic goals. The model is currently being piloted and is open to evaluation by practitioners to assess its relevance and the attainability of the guidelines it provides. He underlined that the model is intended as a dynamic tool, one which is further developed as the industry evolves. He closed by showing future steps for the Model, most notably the development of a knowledge base which can form a basis to set standards for quality in RM.


A member from the audience contributed that we need to focus more strongly on country and political risks instead of institutional risks, Vázquez countered that we need to incorporate both. This is underlined by the fact that many MFIs working in adverse political environments are performing well. She relates this mostly to good governance. Castro-Monge added that external risks out of the MFIs control still need to be reflected in an institution's strategy. Even if not quantifiable, MFIs should consider possible scenarios in terms of effects on the institution's bottom line.

Next, the discussion turned to how to improve the sustainability of capacity building activities. Fryatt advised external experts to focus on changing RM perceptions from RM being a cost-centre to it being a strategy tool. He believes the Graduation Model can help by narrowing down RM practices to needs at the current level of institutional complexity while still providing an option to consider future strategies. Castro-Monge added that it is important to speak to people's emotions. RM works in a similar way as our brain, with rational, instinct and emotional responses. While most practitioners only work on RM on a rational basis, risk culture is also driven by emotion. Vázquez advised a patient approach and to engage with regulators.