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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.
Managing Risk and Creating Value with Microfinance117IndexBoxes, figures, and tables are indicated by b, f, and t, respectively.AACCIÓN International, 12Administrative costs, 41, 44Adverse selection risk, 5–6América Leasing, S.A., 84Anacafé, 9ANED. See National Ecumenical DevelopmentAssociation (Bolivia)Apex institutions, 21Association of Micro, Small, and MediumDevelopment Consultants, 96Audit finance committee, 28BBaca, Hugo Paguaga, 82Banco Solidario (Ecuador), 106–07Bangladesh, 94b, 95bBasel II accords, 10Biometric technologies, 108–09Blue Orchard Finance, S.A., 21bBoard of directorschairperson, 26–27, 28chief executive officer and, 24, 26, 28client representatives, 33committees, 27–28compensation, 34composition, 32–33conflict-of-interest policy, 34daily management responsibilities, 24, 29employee representatives, 33good qualities, 27b, 35information needs, 30letter of appointment, 33meetings, 28–29, 29bmember qualities, 32organizational evolution and, 22, 33performance evaluation, 25b, 31–32, 38tresponsibilities, 23–26secretary, 28service period, 33size, 26social performance management, 24bSee also governance, MFIBoliviabiometric technology applications, 109housing microfinance, 69microleasing, 80, 81, 82–83Bradbury, Ray, 1Brazil, microinsurance coverage, 59, 61bCCaja Los Andes (Bolivia), 80CAMEL. See Capital Adequacy, Asset Quality,Management, Earning, and LiquidityManagementCapital Adequacy, Asset Quality, Management,Earning, and Liquidity Management (CAMEL),12, 13bCapital costs, 42Catastrophe risk deferred drawdown option, 94, 94bCategories of risk, 3rural, 8turban, 4tChief executive officer, 24, 26, 28Chile, microleasing in, 82Client selection. See adverse selection riskCollateralhousing microfinance, 68microleasing, 79Compartamos, 106Compensation personnel committee, 28Competition among lenders, interest rates and, 47–48Consultative Group to Assist the Poor, 12Cooperative Housing Foundation (Mexico), 70Cooperatives, 5Le Corbusier, 65Credit riskdefinition, 3risk management strategies, 13use of personal digital assistants and,106–07, 107fCredit Union Service Corporation, 106DDisability insurance, 53Disaster management. See natural disastersDominican Integrated Development Institute, 31b
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