Implications of Lender Values for Risk Management in the Microfinance Industry

This paper investigates the extent to which the microfinance sector should be influenced by risk management policies from the banking industry. The increasing commercialisation of microfinance is resulting in a greater impetus to implement formal risk policies and practices. Such actions, if conceived with due care and attention to the purpose of microfinance, could be an important step for the industry. However, there is a danger that generic procedures of risk assessment and management, particularly those adapted from purely for-profit industries, could impede this relatively young industry, or subvert its mission.

The discussion centres around a survey of public opinion on the riskiness of a range of investment options and the factors that influence investment decisions, seeking to determine whether the public’s perception of the riskiness might be affected by qualitative factors, such as societal benefits. The survey finds no relationship between overall risk perception and the qualitative factors tested, but does suggest that investment decisions can be explained by two opposing dimensions: social and financial. This leads to a number of implications for the evolution of risk management within the microfinance industry, and highlights dangers of focusing purely on technical risk.

 

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