managing risk.pdf

116Glossarydiverse range of financial services to run their businesses, to build assets, to smooth consumption, and tomanage risks. (See Consultative Group to Assist the Poor, http://www.cgap.org).Microfinance institutions—MFIs are financial intermediaries that offer specialized products (such asloans, savings, and payment services) that match the needs and capacity of low-income households andmicrobusinesses. Some are regulated, supervised financial institutions (such as banks and credit unions) whileothers are more informal (such as rotating savings and credit associations, village banks, and nongovernmentmicrocredit institutions).Microinsurance—Insurance is “a risk management system under which individuals, businesses, and otherorganizations or entities, in exchange for payment of a sum of money (a premium), offer an opportunity toshare the risk of possible financial loss through guaranteed compensation for losses resulting from certainperils under specified conditions.” (http://www.microfinancerisk.org/pages/Glossary.asp?SectionID=10).Microinsurance is the set of products and services that match the needs and capacity of microbusinesses andlow-income households as a specific client target group.Nonprudential regulation—This regulation is the set of government rules that apply to microfinance and thatdo not measure the financial soundness of the MFI. Examples include screening out unsuitable owners andmanagers or requiring transparent reporting and disclosure.Outreach—Outreach is the scale of operations of a financial service provider, usually measured in terms of thenumber of active clients, active loan accounts, active savings accounts, or other measurements of client coverage.Point-of-sale system—In terms of microfinance, the point-of-sale (POS) system consists of terminals thatbelong to a network shared by financial intermediaries. Clients from a number of institutions can use thesame terminals and agents to make payments. Sharing network infrastructure enables financial institutionsto achieve collectively the volume of transactions needed to cover the costs of the software, the hardware, andthe connectivity required to provide distributed payments services. POS terminals generally use card swipetechnology, bar code readers, and modems to transmit data from debit or credit cards to financial intermediaries,thus enabling financial transactions or the sale of products or services.Prudential regulation—This regulation protects the financial soundness of an MFI to prevent it from losingdepositors’ money or damaging confidence in the financial system or both. Examples include capital-adequacyrequirements and rules for provisioning for loan losses. MFIs subject to prudential regulations are sometimesreferred to as “regulated MFIs,” while MFIs subject only to nonprudential regulations are sometimes referredto as “nonregulated MFIs.”Risk management—Risk management is the structured approach to managing uncertainty related to a threat,by way of (1) identifying potential sources of loss, (2) measuring the financial consequences of a loss occurring,and (3) using controls to minimize actual loss or their financial consequences. Risk management strategiesinclude transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, andaccepting some or all of the consequences of a particular risk.Supervision—the process of enforcement of government rules. Financial institutions that are licensed and monitored(supervised) by the government must comply with all requirements and regulations. If they comply, they can acceptdeposits from the public. Failure to comply may result in penalties or the loss of the banking license.Triple bottom line—measurement of institutional success and sustainability according to three “bottom lines”:economic, social, and environmental benefits.