Risk Management

Awareness of the existence of risks in the microcredit sector is a first step towards controlling and reducing these risks. This section describes the three main risks facing MicroWorld lenders: the risk level of the entrepreneur, the risk level of the MFI and the country risk. It also describes the measures taken by MicroWorld to mitigate the level of risk. Some advices are also listed to limit your exposure.

Risk of Entrepreneur Default

Entrepreneurs may not be able to repay their loans for a number of reasons, ranging from personal problems or business problems to political or environmental reasons. Most microfinance borrowers are unable to provide guarantees for their loans, removing one of the main tools used by traditional financial institutions to mitigate credit risk.

Our partner microfinance institutions (MFIs) are experienced in providing credit to the communities they serve, and conduct extensive research before approving a loan. These assessments are typically used to examine the nature of the potential customer, project or existing businesses, their level of poverty and their immediate environment. These analyzes are supplemented by the knowledge of the field of loan officers.

Often MFIs prefer to structure their loans in the form of solidarity groups, whether for a simple moral support, or to form a group whose members guarantee the payment of the group debt in case one of the members defaults.

The default rate in microfinance has been particularly low, but past performance do not guarantee future trends. The global recession has undoubtedly influenced the micro-entrepreneurs to some extent, which makes it even more important the rigorous processes for credit assessments by MFIs.

What does it mean for MicroWorld members?

MicroWorld members are protected from entrepreneur default. In fact, lenders do not have access to sufficiently complete information to assess the risk for each entrepreneur, so it seems logical that MicroWorld lenders not assume the risk of an entrepreneur defaulting.

We have established an agreement with partner microfinance institutions who have experience of credit risk on each client they serve. They guarantee the reimbursement of the loan, even in case of entrepreneur default. Each entrepreneur on the website MicroWorld has previously been met by our partners, and they have approved their request for credit.

Microfinance Institution Risk

MicroWorld partners with microfinance institutions (MFIs) in all countries we operate in. These partner organizations are responsible for evaluating loan applications, disbursing the amounts to borrowers after the loans are approved, publishing loan applications on MicroWorld website, and collecting payments from the borrowers. Our partners have the expertise, experience and local knowledge to carry out these functions the most efficient and safest way possible.

However, like all businesses, our MFI partners are exposed to various types of risks, some of which may affect their ability to pay their debts to their creditors such as MicroWorld lenders.

These include:

-   Bankruptcy: that could be caused by poor operational control, poor risk management or external issues such as changes in the political or environmental context, or fluctuations in the financial markets.

-   Fraud: as in all activities involving the management of large amounts of money, fraud is a constant risk.

-   Portfolio risk: if suddenly a large number of borrowers could not repay their loans, following a severe drought for example, the MFI may find itself unable to pay its debt obligations.

What does it mean for MicroWorld members?

Here are the operational measures that allow us to reduce the risk level of MFIs:

-   Each MFI is subject to a thorough audit, on both financial and institutional plans and on operational aspects and social performance. A microfinance expert independent investment committee decides to accept an MFI based on these audits.

-   Once approved by the Investment Committee, an MFI has a status called "Pilot" which is the first step in our integration process. During this initial period the money that may be collected by the institution will be limited. This step lasts over a period of about 3 months and provides a definitive view on the quality of the partner. During this phase, an operational audit on the ground is also conducted. If the MFI meets the criteria to collect more money on the platform, it is again presented to the Investment Committee and Risk to switch to "confirmed" status.

-   The "Operations" department of MicroWorld and the MicroWorld correspondent, based at the IMF headquarters carry out regular checks and reconciliations to prevent any fraud or system errors.

Despite these measures, it is impossible to eliminate all risks. The possibility that an MFI would not able to repay MicroWorld lenders exists. Therefore, we recommend our members to diversify their loan portfolio between different MFIs and regions available on the website to reduce their exposure to risk.

Country Risk

As well as being aware of the entrepreneur and MFI risks, it is important to assess the macro-economic risks, which may affect an entire country or region, or even the world as in the case of the recent financial crisis. Microfinance is a dynamic sector and highly connected to other economic sectors as well as local political and environmental contexts.
Moreover, microfinance is by nature often located in countries with an history of instability.

Potential risks include:

-   Political risk: the national government can change laws or regulations relating to microfinance, or decide to prohibit the transfer of funds abroad. This happened several times in the past.

-   Economic risk: a sharp increase in inflation or a devaluation of the local currency may pose a significant risk for an MFI in meeting their financial obligations if they are from foreign sources.

-   Risk of natural disasters: extraordinary events such as the tsunami in Southeast Asia in late 2004 or the floods in Pakistan in 2010 can have devastating consequences on the microfinance sector. The poorest people (potentially clients of MFIs) are often the most severely affected by these disasters.

What does it mean for MicroWorld members?

MicroWorld takes into account and assesses the "country risk" in its audit process and selection of partner MFIs. On the project and payment page, alert messages notify the lender if the risk is considered above average. Regular monitoring of macro-economic evolution in the countries in which we are engaged is done to prevent any increase of the risk. Our MFI partners have agreed to bear the risk of currency fluctuations as they have a strong experience as well as mechanisms to manage this risk.

However, country risk is traditionally the most likely "uncontrollable". We advise MicroWorld lenders to diversify their loan portfolios in order to limit their exposure to a particular country or region.