managing risk.pdf

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12 Chapter 1 - Risk Management: Preparing for the Unexpected• Products to be provided the various markets or niches• Market niches—based on the mission statement and management and the board of directorsInternal tools and externally provided services help to measure these risks. Table 1.4 and box 1.2 describe therisk analysis tools used by Shorebank Advisory Services and the CAMEL (Capital Adequacy, Asset Quality,Management, Earnings, and Liquidity Management) approach used by ACCIÓN International, respectively.Other specialized external ratings services that focus on MFIs include Microfinanzas, Planet Finance, andMicrorate. Microfinance Information Exchange provides an international rating service. The ConsultativeGroup to Assist the Poor offers a risk identification tool in its appraisal handbook. 10Table 1.4 Shorebank Advisory Services (USA) Credit Risk Grading SystemGeneral Risk Credit risk grade DescriponLow riskGrade 1 – ExcellentGrade 2 – GoodLoans develop according to projecons or beer, and no problems withrepayment have ever occurred or are ancipated.Grade 3 – SasfactoryPotenal risk Grade 4 – Watch List Loans show deviaons from the project’s business developmentscenario, and problems with repayments can be ancipated.High riskGrade 5 – SubstandardGrade 6 – DoubulGrade 7 – LossLoans have different terms of delinquency, and they are associatedwith different probabilies of being fully repaid. The longer the loan isdelinquent, the less likely it is that the balance would ever be repaid infull.Source: Adapted by the authors from the Palesnian Network, Fact Sheet 5, “Risk Management and the Credit Risk Grading System,”hp://www.shorebankcorp.com/bins/site/templates/default.asp.10. For more information, see Microfinanzas, http://www.microfinanzas.org/; Planet Finance, http://us.planetfinance.org/; Microrate,http://www.microrate.com/; The Microfinance Information Exchange, http://www.themix.org/; The Microfinance InformationExchange Market, http://www.mixmarket.org/; and Consultative Group to Assist the Poor, http://www.cgap.org/p/site/c/.
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 risk management strategies. They develop strong internal information systemsto allow managers to understand and mitigate the risks 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 risks (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 risks 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,
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Eco-AuditEnvironmental Benefits Sta
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