managing risk.pdf
managing risk.pdf
managing risk.pdf
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Managing Risk and Creating Value with Microfinance13Box 1.2 Risk Measurement SystemsNorth American bank regulators first adopted the CAMEL methodology to evaluate the financial andmanagerial soundness of U.S. commercial lending instuons. The CAMEL reviews and rates five areas offinancial and managerial performance:• Capital Adequacy• Asset Quality• Management• Earnings• Liquidity ManagementUsing the original CAMEL’s conceptual framework, ACCIÓN Internaonal developed its own instrument.The ACCIÓN CAMEL reviews the same five areas, but the indicators and rangs reflect the challengesand condions of the microfinance industry. The methodology requires the MFI to provide the followinginformaon:• Financial statements• Budgets and cashflow projecons• Porolio aging schedules• Funding sources• Informaon about the board of directors• Operaons and staffing• Macroeconomic informaonThe ACCIÓN CAMEL performs the following adjustments: (1) loan loss provision, (2) loan write-offs,(3) explicit and implicit subsidies, (4) effects of inflaon, and (5) accrued interest income. The ACCIÓN CAMELanalyzes and rates 21 key indicators, with each indicator given an individual weighng. The final compositerang is a number on a scale of zero to five, with five as the measure of excellence. This numerical rangcorresponds to an alphabecal rang (AAA, AA, A, BBB, BB, B, C, D, and unrated).Source: Global Development Research Center, hp://www.gdrc.org/.Approaches to Managing RisksSuccessful MFIs employ several <strong>risk</strong> management strategies. They develop strong internal information systemsto allow managers to understand and mitigate the <strong>risk</strong>s related to liquidity, internal fraud, and new productdevelopment. They ensure better information on the cashflow, productivity, and other characteristics. Theircredit management systems keep a watchful eye on portfolio quality issues, allowing for swift responses towillful default. They recognize the value of microinsurance to protect borrowers from insurable <strong>risk</strong>s (see chapter4 of this volume for microinsurance). They consistently enforce the loan contract. Finally, their incentives forloan officers are linked directly to portfolio performance.In addition to these general approaches, specific recommendations exist for the special conditions in ruralfinance markets. Greater information on borrowers, crop cycles, productivity levels, and market cycles canreduce the <strong>risk</strong>s of serving rural clients and provide a sound basis for product design. Using such information,MFIs can design the loan product’s specific characteristics (including any grace period, the repayment schedule,