managing risk.pdf

Managing Risk and Creating Value with Microfinance45Loan officer incentivesOne particularly important way an MFI can reduce the risk of loan losses and generate higher productivity perofficer is to create appropriate incentives for loan officers to maintain large and healthy loan portfolios. Thereare many ways to design an incentive program. For example, the MFI can offer a bonus for each successful loanrepayment, or it can target specific productivity measures, like number of clients visited per day. 9Management Information SystemsThe MFI’s management information system is its system of collecting, archiving, retrieving, and usinginformation. The system tracks the loan officers’ productivity and clients’ repayment schedules and balances,among other things. A good information system is vital for making timely assessments of the quality of the loanportfolio and other variables that most affect cost and risk. 10Lowering Interest Rates through Government PolicyConcerned with the high cost of microcredit, governments want to enable microbusinesses and poorerhouseholds to have access to cheaper credit to improve productivity and engage in welfare-enhancing economicactivities. Governments also want to protect the poor from abusive lending practices. However, two of the mostcommon policy and programmatic tools used by the public sector to achieve these goals—subsidizing credit orsetting limits on interest rates—tend to lead to counterproductive results.Subsidized credit programs are usually administered by state-owned financial institutions or take the formof credit lines extended by the government to public or private lenders at below-market rates. Usually, thesubsidized loans are directed toward specific groups of borrowers, like poor women, or specific economicactivities, like housing or agriculture.Such programs often have many repercussions and serious problems. Government institutions maylack the incentives to monitor such loans effectively or control administrative costs, because success isoften defined in terms of credit disbursements rather than loan portfolio quality or operational efficiency.Subsidized credit can be an enormous fiscal drain on governments as well, because borrowers oftenview the loans as lightly disguised grants, with no penalty for incomplete repayment. This perceptionis especially true in countries with a history of debt forgiveness. Box 3.2 describes other effects of subsidizedinterest rates.9. See the MicroBanking Standards Project, http://www.gdrc.org/icm/rating/rate-5.html.10. See the management information system training offered by the Consultative Group to Assist the Poor (CGAP 2009b).