Risk Management Guidelines for Microfinance Institutions
(amended through 2010)
1. General Background
This section emphasizes risk management as crucial to successful microfinance.
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 GuidelinesSource: www.bu.edu
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