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Risk Management Guidelines for Microfinance Institutions

microfinance policy

(amended through 2010)

1. General Background

1.1 Introduction

This section emphasizes risk management as crucial to successful microfinance.

1.2 Objectives

This document provides a risk management framework for all microfinance institutions operating in Ethiopia, setting minimum risk identification, measurement, monitoring and control system and enhancing risk management practice. The guidelines are in line with internationally accepted risk management principles and best practices. Microfinance institutions are encouraged to become risk focused, basing supervision and internal audits on risk management.

1.3 Risk Management Programs

The National Bank requires each microfinance institution to prepare a comprehensive risk management program addressing:

– Liquidity Risk

– Interest Rate Risk

– Operational Risk

1.4 Risk Management Process

Risk management optimizes risk-reward trade-off. Risk management consists of 4 key processes:

– Risk Identification

– Risk Measurement

Risks should be measured in terms

of size, duration, and probability of adverse occurences

– Risk Control

Risks may be controlled or minimized by avoiding/placing limits on activities/risks, mitigating risks, and/or offsetting risks.

– Risk Monitoring

1.5 Basic Elements of Risk Management Framework

The key elements to a sound risk management system include:

– Active board and senior management oversight

– Adequate policies, procedures, and limits

– Adequate risk measurement, monitoring, and management information systems

– Comprehensive internal controls

A risk management committee or risk manager should be assigned to evaluate and determine level of risk.

Risks should be considered in relation to each other.

Contingency planning is also crucial to risk management.

Microfinance institutions must submit their risk management systems and updates within three months from the effective date for review by the National Bank.

2. Strategic Risk Management Guidelines

Category: Payday loans

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