managing risk.pdf

Managing Risk and Creating Value with MicrofinanceixPrefaceResults of a South American Dialogue SeriesWhen World Bank staff members meet with representatives of a country’s microfinance sector, microfinanceinstitution (MFI) managers often assume that they will receive some kind of new financing—creditlines, guarantees, or grants—to support their development efforts. They do not expect the Bank to providetechnical assistance or best-practice information.More recently, however, representatives in four countries have observed that, in keeping with the World Bank’snew role as a “knowledge bank,” the Bank’s new knowledge-sharing priorities mean that it can provide more thanjust new funding. It can provide access to recent developments in international best practices in microfinancemanagement, build South-South learning dialogues, and address strategic and operational challenges. As aresult of this realignment of Bank priorities, MFI managers have access to world-class expertise, innovativetechnologies, and tools in risk management.This report brings together the results of an eight-part series of presentations by leading experts in issuesdirectly related to microfinance institutional sustainability. It is intended for MFI board members, managers,and staff members—as well as for government regulators, supervisors, and donor staff members. The first fourchapters include topics in risk management: (1) risk management systems, (2) good governance, (3) interestrates, and (4) microinsurance. The last four chapters include four topics in new product development andefficient delivery methodologies: (5) housing microfinance, (6) microleasing, (7) disaster preparedness productsand systems, and (8) new technologies.Microfinance practitioners and government supervisors and regulators in Bolivia, Colombia, Ecuador, and Peruparticipated in the presentations and discussions. In addition, a group of Argentine practitioners was able toview the presentations through simultaneous Webcasts. The objectives of the series were as follows:• To strengthen MFIs by disseminating innovative approaches in risk management, cost control, governance,and new technologies• To promote a South-South exchange of experiences and lessons learned• To promote greater ties among the MFIs in the region and between MFIs and government supervisorsand regulators• To highlight the Bank’s ability to mobilize international technical expertise in microfinanceThe World Bank’s move to engage with MFIs in the four countries began in 2006, which was a critical yearfor microfinance in Latin America. In that year, the Bank identified a new trend of financial sector policies—represented by newly elected governments in Bolivia and Ecuador—that would ultimately and artificiallylower microfinance interest rates, interfere with the sustainability of MFIs, and reduce outreach. Rather thanexpanding product menus and introducing cost-saving technologies, the new governments sought to improveaccess to credit by mandating interest rates below the rate of inflation. Experience has shown that such a policyleads to credit diversion and a decrease in sustainable lending to microbusinesses and poor households.In contrast, the Peruvian and Colombian governments moved to ensure the growth of a commercial microfinanceindustry through a number of sound regulatory and supervisory options. Given such developments, the Banksaw an opportunity to sponsor a broad policy dialogue with the policy makers and representatives of nationalmicrofinance industries to review policy options and new approaches. This book reflects the technical supportand dialogue that developed.