UNIVERSITE LIBRE DE BRUXELLES

EUROPEAN MICROFINANCE PROGRAM 2015/2016

Risk Management: How To Mitigate Over-Indebtdness?

Adele Voyeux

2

Table of Contents

INTRODUCTION 3

THE IMPORTANCE OF OVER-INDEBTEDNESS IN RISK MANAGEMENT 3

A RISK MANAGEMENT FRAMEWORK FOR MFIS 5IDENTIFY, ASSESS, AND PRIORITIZE RISKS 6DEVELOP STRATEGIES TO MEASURE RISK 6DESIGN OPERATIONAL POLICIES AND PROCEDURES TO MITIGATE RISK 7IMPLEMENT INTO OPERATIONS AND ASSIGN RESPONSIBILITY 7TEST EFFECTIVENESS AND EVALUATE RESULTS 7REVISE POLICIES AND PROCEDURES AS NECESSARY 8

RISK MANAGEMENT AND OVER-INDENTEDNESS 8THE DRIVERS OF OVER-INDEBTEDNESS 8HOW TO MITIGATE OVER-INDEBTEDNESS 9CONCENTRATED MARKET COMPETITION AND MULTIPLE BORROWING 9OVERSTRETCHED MFI SYSTEM AND CONTROLS 10EROSION OF MFI LENDING DISCIPLINE 11

CONCLUSION 13

BIBLIOGRAPHY 14

3

Introduction Microfinance’s public image has been shrinking with its recent threat of “Mission Drift” (Armendariz & Szafarz, 2011). However this loss of reputation didn’t stop the demand from soaring, and the global microfinance industry is experiencing a 15-20% annual growth rate (Etzensperger, 2014).

As the competition is starting to kick in and the microfinance insitutions are becoming bigger and transforming themselves into banks, there is an increasing need for a risk management department. MFIs can become a victim of their own success if they don’t adapt themselves to the new market and properly manage the new risks (Mersland & Strøm, 2012). To be able to take effective business decisions and be sustainable over the long term, MFIs first need to make sure that they have complete control over the risks they are facing (Steinwand, 2000). A great risk management department needs to be able to anticipate and control the risks before they occur, rather than reacting to them once they actually happenened and damaged the organisation (Hutter, 2011).

Over-indebtedness is one of the major risks confronting the MFIs. Over-indebtedness can affect the MFI’s viability and its client’s well being. Usually the clients will try everything in their power to try to repay the loan, as they feel pressured, and this can affect their financial and mental stability (Schicks, 2011). Even so, in this essay we will mainly look at the over-indedtedness issue from an institutional point of vue, and not the client’s perspective. In other words, we will study over-indebtendess’ impact on the MFI’s sustainability, and how its risk management department manages it to mitigate it.

In the first part of this essay, we will analyze over-indebtedness and demontrate its great importance for the risk management department. In a second part, we will describe a common risk management framework tool and explain how it can be used to control over-indebtedness. In a third and final part, over-indebtedness’ drivers and different mitigation strategies are studied. The Importance of Over-Indebtedness in Risk Management Like any other institution, MFIs face large risks that can negatively affect the organisation if they are not properly managed. Usually, the managers are not willing to take responsibility for the risks, being considered as an additional trouble. Human being’s are self-centred, and will always seek solutions where the least effort is required (Zipf, 2012). Hence, managers won’t increase their workload, by anticipating risks that may not even occur, but only react to them once they have taken place. In a growing industry, where competition is increasing, the MFIs drastically need to be able to dominate these risks as they are increasing in number and importance. An MFI can make confident business decisions about its future sustainability, if and only it has complete control over the risks that it is comfronting. Risk management was therefore created with the objective of anticipating and mitigating risks before they develop themselves (Churchill & Coster, 2001).

4

Having the right risk management framework can be very complicated. The MFI’s main challenge, compare to any traditional organisation, is that they evaluate their performance on both financial and social objectives (Schicks, 2010). MFI’s pool of stakeholders is therefore larger, including donors and non-regulatory bodies whom also have an interest in a better risk management protecting their investments. Consequently, MFI’s while implementing their risk management framework, have to including the interest of the vast majority of their stakeholders (Steinwand, 2000).

In the Banana 2014 Skins report, different MFIs of various countries where asked what really keeps them awake at night. The majority of the MFI managers felt that over-indebtedness is the greatest risk facing the microfinance industry in 2015. Over-Indebtedness is a common risk in microfinance that keeps on happening (Lascelles, Mendelson, & Rozas, 2014). Frank Abate, exective director of the Fundacion Dominicana de Desarollo in the Domonican Republic, well describes the idea by saying: “Over-Indebtedness, again and again”. Microfinance’s Industry should now be an expert in preventing and confronting this risk, after the numerous collapses it experienced in Nicaragua, Morroco or Andra Pradesh. In some of those cases, the crisis drove to some borrowers suicides. For instance, the Andra Pradesh crisis led to more than 80 suicides (Biswas, 2010). These scandals, of course, led to a requestioning of microfinance’s ability to alleviate poverty, and damaged it’s reputation. Microfinance’s industry still hasn’t learnt how to prevent over-indebtedness and there is the menace of a new crisis (Mader, 2015).

An over-indebtedness crisis can have several consequences on the MFI’s sustainability and reputation but also on the country and the borrowers economy (Firth, 2014). Firstly, as the number of over-indebted individuals increase among the MFI’s clients, the figure of repayment default in the loan portofolio also increases. This decrease in repayment rates could badly impact the financial sustainability of an MFI (Armendáriz & Morduch, 2010). Secondly, over-indebtedness can hinder the social objective of an MFI. The MFI’s main goal is to help the poors, and not place them in a difficult situation were they can’t repay their debts. In the short run, overindebtedness usually heads to social, economical and psychological problems among the borrowers. In the long run, again the ones impacted by the crises are the borrowers, as they may face a hard time to access credit for the years to come (Flirth, 2014). For instance, in Nicaragua, after the “Non Pago Movement”, it was hard for anyone to get a loan from any MFI as non of them were in a good position to service one (Servet, 2013). Finally, over-indebtedness results in a negative reputational damage for the MFI and the whole microfinance industry. It can be very dangerous for an MFI to have a bad reputation associated to over-indebtedness, as they might lose trust and legitimacy, heading to an even bigger number of clients non-repaying their loans. Moreover, a bad reputation can create difficulties for an MFI to attract external social fundings or donations. An over-indebtedness scandal doesn’t only affect the MFI’s own

5

reputation, but the whole industry, and therefore pushing away socially responsible private investors into the industry (Reille, Forster, & Rozas, 2011).

As a result, Over-indebtedness can have many different negative impacts affecting an MFI’s sustainability and its social objective. It is a major risk and strategies need to be implemented to prevent it from happening. However before being able to anticipate and mitigate over-indebtedness, it is essential to well understand the meaning of over-indebtedness (Schicks, 2010). Fom a risk management perspective, over-indebtedness will mean three different things: number of loans contracted, delayment of debt payment (so PAR 30) and income to debt ratio (Schicks & Rosenberg, 2011). The traditional definition of over-indebtedness is someone that has multiple borrowing (Schicks, 2010). However multiple borrowing is not the same as over-indebtedness. Someone can have several loans, and still be in the capacity to repay them back, while anoter individual can only have a single loan and not be able to repay it. According to Isbalelle Guerin, cross borrowing is a comon characteristic of the poors. Poor households will try to efficiently manage their cash flows, by having several sources of credit, from different sources (formal and informal), increasing their accessibility and flexibility in times of shocks (Labie, Laureti, & Szafarz, 2015). Over-indebted is therefore defined as someone that can’t repay his debts. Once the person hasn’t repaid it’s loan then it is too late for the MFI (Schicks, 2011). The MFI thus needs to anticipate this result, and mitigate it before it actually happens. Usually from a risk management perspective, the over-indebtedness of a certain individual is determined with a high debt to income ratio. However this ratio can be misleading and imprecise, as we are choosing the treshhold by ourselves. How can we know what it the debt amount that makes someone over-indebted? Of course this will depend on the individual and on the country in question. It is hence important for an MFI to take these into account, and make sure that they well detect over-indebtedness.

From a client’s perspective, over-indebtedness can be defined as the moment when they have serious problems repaying their loan, implying that even people that are reimboursing their loan can be considered as over-indebted (Schicks & Rosenberg, 2011). However in this essay, over-indebtedness is only analyzed from the MFI’s and not the client’s perspective. But the moment the borrower surpasses its risk absorption capacity to repay the loan, then the risk spins back into the MFI’s portfolio (Schick 2012). As a result the MFI should also take into account the client’s characteristics and point of view when designing a risk management framework, to make sure that the risk won’t come back right at him. A risk Management Framework for MFI’s An efficient risk management framework is one that continuously access, monitor and manages the risks. Once the over-indebtedness risk has been accessed, the MFI need to design and implement appropriate strategies to handle it. A successful MFI will

6

incorporate its risk management strategy into its organizational design, lending methodologies and operational procedures (Flirth, 2014). A common Risk management framework used by the MFI’s is the Risk Management Feedback Loop.

Figure: Risk Management Feedback Loop [Steinwand, D. (2000). A Risk Management Framework for Microfinance Institutions . Deutsche Gesellschaft für]

As we can notice on the figure, to be able to properly manage it’s daily risks and long term risks; an MFI should go over various steps (Steinwand, 2000). These steps are quickly summarized below.

Identify, assess, and prioritize risks Firstly the MFI needs to identify the different risks it faces by conducting interviews at different levels in the organization. Once the risks have been identified in its activities, the MFI presents a risk assessment matrix to demonstrate the probability and the importance of each risk occurring (PlaNetFinance, 2014). With these informations, they can prioritize which areas need additional attention in the MFI’s activities. Looking at the 2014 Banana Skins report, the MFI’s felt that Over-Indebtedness is the most critical risk and considerable attention should be given to it (Lascelles, Mendelson, & Rozas, 2014).

Develop strategies to measure risk Once the risk has been determined, it is important for the MFI to measure it and understand at what stage of its development it is. Is the amount of risk acceptable, or is it at a stage where we need to find a way to deal with it? The board will therefore

7

develop some main strategies that will guide the organization to manage those risks. These strategies are usually broad, and the board hence has to also develop some new guidelines for the day-to-day operations. For instance, the MFI can implement a set of KRI (Key Risk Indicators) that will have to be calculated on daily and monthly basis, in the aim of measuring the level of over-indebtedness the MFI is facing (Davies, Finlay, McLenaghen, & Wilson, 2006). The common KRIs that an MFI will use are: number of loans contracted, delayment of debt payment (so PAR 30) and income to debt ratio. However these ratios are not taking into account the satisfaction of the client’s and their mental state. These should also be analyzed, through interviews. Finally, these policies and guidelines need of course to be aligned with the different stakeholders interests and the MFI’s mission. When developing the different strategies, the board also has to prepare a cost-benefit analysis, making sure they are financially viable for the organization (Steinwand, 2000).

Design operational policies and procedures to mitigate risk Appropriate lending methodologies and monitoring tools are then designed to make sure that the risk will not exceed a certain threshold, and that if it does the organization is able to overcome it. There are already some guidelines that were proposed by the Bank Supervision Committee of Basel, to be included in the regulatory frames of the MFI’s (Kruijff & Hartenstein, 2014). However these guidelines are here to mitigate any risks that an MFI can face in general, and more specifically credit risk. In the next section, we will explain in more details the main mitigation procedures that are used for Over-indebtedness.

Implement into operations and assign responsibility The policies are integrated into the operations and the responsibility is assigned to a manager. It is important that the authority is appointed to a specific person with operations experience and leadership skills, so that they can effectively track the efficiency of the operations. This manager will have to make sure that he well communicates the importance of this risk to all the different employees of the institution, giving them a sense and feeling of responsibility. The motivation and the support that the employees give to a certain manager can be increased by involving them in the design process. There input can be very helpful. Managers need to make sure that the interest of all the different stakeholders is taken into account, especially the clients one, making sure that the procedures voted won’t harm them in any way (Steinwand, 2000).

Test effectiveness and evaluate results It is essential to evaluate the impact and effectiveness of a certain procedure, and make sure that it is well mitigating the over-indebtedness risk. To be effective, the operational system needs to appropriately deliver the intended outcome, in a cost-effective manner (Steinwand, 2000). To verify this, the boards can revise the audit process and search for frauds or a sign of an increase in the risk. However not only “hard” informations are useful in analyzing the effectiveness of a certain process,

8

“soft” informations are also needed (Cornee, 2015). As a result, they should conduct interviews with the clients and the loan officers and include them in the audit process.

Revise policies and procedures as necessary If the procedures have been declared as unsuccessful, the managers and the board of directors need to react quickly, making sure that there losses are minimalized (Steinwand, 2000). In conclusion, the management feedback loop is a framework that helps the MFI to identify the main risks that needs to be controlled. Once the main risks are identified, the MFI can develop and implement strategies and policies to control it. The effectiveness of these policies are later on evaluated to determine their effectiveness, and if they are labelled as not effective, then strategies are re-designed and re-implemented with the aim of solving the problem. This framework is not only used to determine the different risks an MFI is facing, but can also be used for one specific risk. As over-indebtedness is a common risk that can threaten the viability of an MFI, the whole management feedback loop’s process is done more frequently for this specific risk. Over-Indebtedness is generally tracked on a monthly basis, by the manager of the risk department and the board of directors. Risk Management and Over-Indebtedness The drivers of Over-indebtedness Before being able to enumerate in more details the different procedures that an MFI can implement in it’s operations to mitigate over-indebtedness, it is important to well understand where over-indebtedness comes from. What are the main drivers of over-indebtedness? As we explained in the pervious section, the level of over-indebtedness is usually measured using the KRI indexes such as the PAR 30 ratio. However what can cause their increase? And therefore the threat of over-indebtedness (Schicks, 2011). The risk of over-indebtedness was born alongside the sudden growth of the Microfinance Industry. Rapid, and therefore uncontrollable growth has great chances to lead to an increase in over-indebtedness. Microfinance needs to be careful not to become the victim of it’s own success (Mersland & Strøm, 2012). A lot can be learned by examining previous collapses, and during the Foro Nantik Lum de microfinanzas’s 4th All-day Conference Series held in Madrid (28th of April 2009), it was very well put “Crisis is arising as an opportunity to learn and elaborate better future proposals”. So when analysing the origins of the collapses in Morocco, Bosnia, Pakistan and Nicaragua, the CGAP in 2010 found that the major reasons at the heart of the over-indebtedness problem were (Greg Chen, 2010): •  Concentrated market competition and multiple borrowing •  Overstretched MFI systems and controls •  Erosion of MFI lending discipline

9

Firstly, the Microfinance Industry’s growth led to a significant increase in competition (Assefa, Hermes, Meesters 2013). MFI’s started to compete on the interest rates charged, and the number of clients they have in their portofolio. As the MFI’s had to lower their interest rates to stay on the market, they began to charge various additional fees, that would confuse the borrower. Borrowers didn’t know the real interest rate they were paying, and were thus wrong when calculating their capacity to repay their loan (mftranspacrency, 2016). Many borrowers thought they could repay a loan, when they actually couldn’t because of the additional fees, and over-indebtedness started to increase. Moreover, with competition, the credit bureaus had more difficulties to well function. It became hard to know if a certain individual already had a loan from another institution or not, as they were too many new institutions coming in the market and it was difficult to track them all. Even if they were efficiently tracked, in some cases the MFIs will still accept a borrower that had a loan in another institution, just to increase their loan portfolio. Secondly, as an organisation grows in size, they need to adapt themselves and have new management techniques. A bigger organisation can be more demanding than a smaller one. For instance, keeping 1000 clients in the books is not the same as keeping 100,000 clients. Most of the time the MFIs didn’t had the time to accommodate, which can head to the mal functioning and poor management of several MFIs, leading to over-indebtedness. Finally, with the growth, the competition, and the desire to increase their client base; the MFI’s started to weaken their screening mechanisms (Assefa, Hermes, Meesters 2013). It became easier for anyone to get a loan from an MFI, and hence the number of risky investors increased in the MFI’s portfolio. Credit Officers were not thinking of increasing the stability of their portfolio, but only of increasing their number of clients. This also led to multiple borrowing, as it became easier for borrowers to get loans from various institutions (McIntosh, Janvry, & Sadoulet, 2004).

As a consequence, over-indebtedness is a result of the struggle that the MFIs face when trying to handle rapid growth and competition. To be able to mitigate over-indebtedness at a maximum, the MFIs therefore need to find ways of preventing these consequences of growth to happen, so that over-indebtedness doesn’t appear.

How to mitigate over-indebtedness In this part, we will examine the different strategies that an MFI can implement in its operational activities to reduce the possibility of any of the above three over-indebtedness causes to occur.

Concentrated market competition and multiple borrowing As the demand for microfinance is growing and it’s industry is expanding, the number of actors entering the market is also augmenting (Assefa & Hermes et al., 2013). There are cooperatives, NGO’s and more recently banks. With growth, Microfinance institutions are in search of new sustainable ways of funding themselves such as deposits. The number of NGO’s transforming themselves into regulated bodies such as banks is thus tremendously increasing (Armendariz & Szafarz, 2011).

10

Transforming themselves into banks helps them increase their outreach objective, as they obtain deposits, and gain economies of scale (Hartarska & Nadolnyak, 2007). The new entry of competitors can create significant problems in the microfinance market, as most of them are competing for the same clients (Assefa & Hermes et al., 2013). The urban market is becoming saturated. MFIs main attention is to keep its share of the market, and might use unethical methods to do so. Competition can weaken the social objective of an MFI, as financial sustainability might become their major priority (Schicks, 2012). It is important to point out that the most sustainable MFIs are the ones that are the most mission fulfilling, as they are the ones that can stay the longest on the market (Armendariz & Szafarz, 2011). MFI’s should therefore not forget their social objective at the expense of their financial one. To avoid being stuck in a competitive market, MFI’s should try to seek non-saturated markets (Firth, 2014). A thorough market analysis should be conducted several times a year, by the risk management department. This analysis done, using the geographical concentrations, can help them detect the current “hot spots” where the market concentration is high. MFIs must avoid these zones, and maybe withdraw some of their current branches (Firth, 2014). The branches can later on be re-opened in areas where the competition is of a lesser extend, and where the population is in a greater need of financial inclusion. The main aim of microfinance is to alleviate poverty by providing financial services to the poorest, and recent studies demonstrate that the rural areas are in great need (Seibel, 2007). The agricultural sector is crucial for the world’s economy, and more attention should be given to it. Moreover, with competition, most of the actors are competing on the prices offered to the clients. Most of the time the MFI will hide the interest rates charged, making the loan look cheaper to the client (Financial Times, 2010). In these cases the client is confused, and is not sure of the amount of interest he is actually paying. This can lead to multiple borrowing, as their repayment calculations are wronged because of the non-transparency in the interest rates. MFIs should therefore make sure that the interest rates they charge are transparent, and new regulations should be put into place (mftransparency, 2016). There is already a campaign put into place, called the Smart Campaign that protects the consumers, by implementing transparency in the MFIs pricing procedures (The Client Protection Principles, 2016).

Overstretched MFI system and controls MFIs need to make sure that they can well manage the huge growth and the quick escalation in client’s number. First of all, it is crucial that the MFI is able to well record its data. As their client base and scale are increasing, it is becoming harder and harder for an MFI to record its data manually. An MIS (Management Informational system) can help them record, track and monitor their clients (Ashta, Barnett, Dayson, & Supka, 2015). The software is very useful, helping the MFI in measuring and accessing over-indebtedness, as they can clearly track all of their clients. The MIS can also help the MFI in their reporting process, as they can produce the reports needed with the data available, at a quicker paste. Finally as all the datas are recorded on a software, it is ready for the credit

11

bureaus to acquire them. Credit bureaus can gather all the datas of the different MFIs (by geographic location), and share the information with the different MFIs, making sure that client’s are not multiple borrowing. The use of credit bureaus has a positive relationship on the loans performance (Janvry, Luoto, McIntosh, Rafert, & Sadoulet, 2006). The MIS system is expensive and challenging for an MFI to acquire. Nonetheless, there are different ways to reduce the cost. The MFI can either share the costs with another MFI, or use the “cloud” technology (Armbrust et al, 2009), where you can buy only a part of the server that interests you, for instance the SaaS (Ashta & Patel, 2013). These specific services are of course a lot less expensive than if you buy the whole software. Secondly, they need a strong well-composed board that can undertake the responsibility and the challenges that come with a rapid growth (Carpenter & Westphal, 2001). To be efficient, the board needs to be aware of everything and in control of it all. They must conduct regular weekly or monthly meetings with its employees, making sure that everything is in order. Credit officers are the first one in line to detect if there is a risk of over-indebtedness, as they keep a close relationship with the client (Agier & Assuncao, 2009). Being close to it’s employees, implementing them in the operational and decisional process, and having a good communication with them can be very beneficial for the MFI (O'Brien, 2014). Thirdly, the MFI needs to have regular internal and external audit checks. External audits can be done by hired external auditors and regulators. They are here to detect any general abnormality in the books. Internal audit will on the other hand, help to detect any increase in risk, however at branch levels (Firth, 2014). Finally, as an MFI is growing in scale, it is important that the MFI is not led by a thirst for profit, and experiences mission drift (Armendariz & Szafarz, 2011). Microfinance should not loose it’s social objective at the expense of it’s own success. The MFI should therefore always think of the client first, be client-centric (Kilara & Rhyne, 2014). This of course entails that they need to conduct thorough interviews with the clients, ensuring that they are satisfied with the products, and enabling them to be part of the decisions made by the MFI. Internal Interest rate caps could be implemented (Firth, 2014). They are internal targets chosen by the MFI. It brings incentive to find new ways to innovate, be more efficient and decrease the interest rates. These interest rate caps should be chosen with respect to the client’s ability to pay back. These new rates will of course support client’s repay their loan with less effort. It will help the MFI fulfil its social objective, and at the same time, increase the industry’s reputation and thus its attractiveness to the investors.

Erosion of MFI lending discipline Competition makes it harder for the existing MFIs to stay on the market (McIntosh, Janvry, & Sadoulet, 2004). They are all fighting over the same clients. To gain more clients, and staying on the market, certain MFIs will weaken their screening process. This enables them to accept more clients. However this strategy can come at the expense of their sustainability, as their number of riskier clients increases and the portfolio’s quality decreases. Moreover, as it is easier for clients to acquire a loan,

12

they will start having loans from several organisations rising their probability of over-indebtedness. Research will indicate that the client’s risk falling into areas increases with the number of loans. Is is consequently crucial to make sure that the MFI won’t loose it’s screening structure, as it wants to compete in the market.

The main threat to over-indebtedness are the credit officers (Guérin, Morvant-Roux, & Villarreal, 2014). They have the power in choosing their clients, and therefore responsible for the riskiness of the portfolio. Credit officers should be working at the MFI’s interest, however they are as any other human beings, thinking of their own interest. They will thus take the easiest clients that will demand the least effort from them but might not be the best for the MFI. The MFI needs to be able to control them, and align their interest with the MFI’s one. Firstly the MFI can constantly monitor them by conducting weekly or monthly meetings. For instance, each branch manager in Centenary rural development bank in Uganda has weekly meetings with its credit officers, going over all of the loans serviced, and making sure that the right decisions are made (Siebel, 2002). Secondly the MFI can implement some incentives that will align their own interest with the MFI’s one. As Mr Siebel well stated it in a Conference on Risk Management at the Microfinance week held in Luxembourg in 2015: “Positive incentives are the most efficient ones”. In other words, instead of charging a penalty to the credit officers if their portfolio reaches a repayment rate lower than a certain threshold, it is more efficient to incentivise them by giving out rewards to the credit officer that has the best portfolio. The incentives can be material or psychological: material such as financial rewards; psychological such as a positive announcement in front of all the other colleagues that can augment it’s reputation (Mullainathan & Krishnan, 2008).

Finally, it is important to educate the credit officers, but the client’s as well. Microfinance’s aim is to alleviate poverty by providing services to its clients. Sometimes, financial services are not enough, and technical assistance might be needed. Via technical assistance, the MFI can educate the client. They can teach them the importance of credit and advise them on how to plan and determine their repayment capacities. Poor borrowers have certain psychological biases such as procrastination or hyperbolic discounting that can affect them in their repayments (Mullainathan & Krishnan, 2008). These biases can be solved through education. Moreover, to reduce these psychological biases, adding extra discipline into the contracts, can help the clients in their repayment (Labie, Laureti, & Szafarz, 2015). Tightening credit standards will lower over-indebtedness. However a loan contract that has too much discipline can scare the client’s and prevent the poor households from having a loan. It is therefore important to also include some flexibility in the contract terms, making sure that they do respond to the cash flow’s or characteristics of the poor households. Careful balancing is needed (Schicks, 2011).

13

Conclusion In conclusion, the recent fell in Microfinance’s reputation didn’t stop the industry from growing. The MFIs need to learn how to manage the new risks entering the market. Nonetheless many MFIs refuse to implement risk management in their culture, as they just don’t see the need to. In other cases, the MFIs, like any human being, have difficulties in planning the future, and will therefore only concentrate on the present and not try to anticipate any risks that may later on confront them (Mullainathan&Krishnan,2008). However, this is crucial for any MFI if they want to become sustainable and efficient in the long run (Kruijff & Hartenstein, 2014). The Management Feedback look is an initial framework on which the MFI’s can build on a solid risk management foundation. Over-Indebestess is one of the biggest threats that any MFI faces. They should be in control and ready to face it. MFIs can use various methods to mitigate this risk, but all of them need to be in line with their social and financial objective. The most mission fulfilling MFIs are the ones that stay on the market the longest. Over-Indebtedness is a threat to the MFI’s financial sustainability and reputation, but most importantly has a negative impact on the borrowers. Over-indebtedness comes from the fact that the borrowers are not capable of repaying their loan. It is thus imperative to make sure that the MFIs are well answering to the needs of the borrowers. In other words the services offered need to be well tailored to the client’s characteristics, to facilitate their repayment. The ways the products are designed is critical. MFIs need to be more client-centric. Over-Indebtedness is an important risk, but it is not the only one. It is essential to manage all of the risks, as they are most of the time linked to each other. For instance, if an MFI doesn’t control well it’s credit risk, then this could lead to over-indebtedness and liquidity risk as well. Risk management thus has to take into account all the different risks. By accepting the risks, and proactively responding to them, the MFI’s are opening doors for themselves, and can increase their outreach to the poors and successfully fulfill their mission.

14

Bibliography Agier, & Assuncao. (2009). The Role of Credit Officers in the Performance ofMicrocredit Loans: Evidence from Vivacred in Brazil. Universite Libre deBruxelles.Armendáriz, B., & Morduch, o. (2010). The Economics of Microfinance: SecondEdition.TheMITPressCambridge,MassachusettsLondon,England.Armendáriz, B., and A. Szafarz (2011), "On Mission Drift in MicrofinanceInstitutions,” in: B. Armendáriz and M Labie (Eds.), The Handbook ofMicrofinance,London-Singapore:WorldScientificPublishing,341-366Armbrustetal(2009):AbovetheClouds:ABerkeleyViewofCloudComputing.UCBerkeleyReliableAdaptiveDistributedSystemsLaboratoryAshta, A., Barnett, B., Dayson, K., & Supka, G. (2015).Management InformationSystemsforMicrofinance:CatalyzingSocialInnovationforCompetitiveAdvantage.CambridgeScholarsPublishing.Ashta, Arvind & Patel, Jiten (2013), Software as a Service: An opportunity fordisruptiveinnovationintheMicrofinancesoftwaremarket? Journalof InnovationEconomicsAssefa, E. & Hermes, N. and Meesters, A., (2013). Competition and thePerformanceofMicrofinanceInstitutions,AppliedFinancialEconomics,23,9,pp.767-782.Biswas,S.(2010,December16).India'smicrofinancesuicideepidemic.BBCNEWSCarpenter, M. A. and Westphal, J. D. (2001). ‘The strategic context of externalnetwork ties: Examining the impact of director appointments on boardinvolvement instrategicdecisionmaking’. AcademyofManagement Journal, 44,639-660.Chen, G., Rasmussen, S., & Reille, X. (2010). Growth and Vulnerabilities inMicrofinance.CGAP.Churchill, C., & Coster, D. (2001). Mocrofinance Risk Management Handbook.CARE.

15

Cornée,S.(2015),“TheRelevanceofSoftInformationforPredictingSmallBusinessCredit Default: Evidence from a Social Bank” The Journal of Small BusinessManagement.WP-CREMNo201226.Davies, J.,Finlay,M.,McLenaghen,T.,&Wilson,D. (2006).KeyRiskIndicators–Their Role in Operational Risk Management and Measurement. RiskBusinessInternationalLimited.Etzensperger, C. (2014).Microfinance Market Outlook 2015: Growth driven byvastmarketpotential.ResponsAbility.FinantialTimes(2010),“ClientsareVulnerableandFragile”.Firth, B. (2014). Over-indebtedness, A Risk Management Approach. VisionFundInternational.Microfinance,CEOWorkingGroups.Guérin, I. 2000. Pratiquesmonétaires et financières des femmes en situation deprécarité: Entre autonomie et dépendance. Doctoral thesis in economics.UniversitéLumièreLyonII.Lyon.GregChen,S.R.(2010).GrowthandVulnerabilitiesinMicrofinance.CGAP.Guérin,I.,Morvant-Roux,S.,&Villarreal,M.(2014).Microfinance,DebtandOver-Indebtedness:JugglingwithMoney.Routledge.Hartarska,V.,Nadolnyak,D.,2007.Doregulatedmicrofinanceinstitutionsachievebettersustainabilityandoutreach?Cross-countryevidence.AppliedEconomics39,1-16Hutter,B.M.(2011).AnticipatingRisksandOrganisingRiskRegulation.Janvry, A. d., Luoto, J., McIntosh, C., Rafert, G., & Sadoulet, E. (2006). BetterLendingAndBetterClients:CreditBureauImpactonMicrofinance.Kilara, T., &Rhyne, E. (2014).Customer-Centricity forFinancial Inclusion:CGAPBRIEF.CGAPBRIEF.Kruijff,D.,&Hartenstein,S.(2014).MicrofinanceandtheGlobalFInancialCrisis:ACallforBASEL.IFCInternationalFinanceCorporation.Labie,M.,Laureti,C.,&Szafarz,A.(2015).DisciplineandFlexibility:ABehavioralPerspective on Product Design in Microfinance . ULB CEB Working Paper N°15/020.Labie,M.,Laureti,C.,&Szafarz,A.(2015).DisciplineandFlexibility:ABehavioralperspective on Product Design in Microfinance. Brussels: Université Libre de

16

Bruxelles-SolvayBrusselsSchoolofEconomicsandManagementCentreEmileBernheim.Lascelles,D.,Mendelson,S.,&Rozas,D.(2014).MicrofinanceBananaSkins2014:FacingReality.CSFICentrefortheStudyofFinancialInnovation(CSFI).Mader,P.(2015).ThePoliticalEconomyofMicrofinance:FinancializingPoverty.McIntosh,C., Janvry,A.d.,&Sadoulet,E.(2004).HowRisingCompetitionAmongMicrofinanceInstitutionsAffectsIncumbentLenders. JELclassification:O16,D14,L1.mftransparency.(2016).mftransparency.org.RetrievedfromPromotingTransparentPricingintheMicrofinanceIndustry:http://www.mftransparency.org/Mersland, R. & Strøm, R. Ø. (2012), “The Past and Future of MicrofinanceInnovations”, In Cumming D. (Ed), The Oxford Handbook of EntrepreneurialFinance.OxfordUniversityPress,NewYork.Mullainathan,S.,&Krishnan,S.(2008).PsychologyandEconomics:WhatitMeansforMicrofinance.TheFinancialAccessInitiative.O'Brien,P.(2014,May9).WhyStrongEmployee/EmployerRelationshipisimportantandHowtoAchievethis?RetrievedJanuary2016,fromBusinessToCommunity:http://www.business2community.com/strategy/strong-employeeemployer-relationship-important-achieve-0876781#6xP7hO3B2cFMZAAB.97PlaNetFinance.(2014).MicrofinanceRiskMappingTool:Version2.0:UserGuide.Reille, X., Forster, S., & Rozas, D. (2011). Foreign Capital Investment inMicrofinance:ReassessingFinancialandSocialReturns.CGAP.Schicks,J.(2011).MicrofinanceOver-Indebtedness.CGAP.Schicks, J. (2010).MicrofinanceOver-Indebtedness:Understandingitsdriversandchallengingthecommonmyths .UniversitéLibredeBruxelles - SolvayBrusselsSchoolofEconomicsandManagementCentreEmileBernheim.Schicks,J.(2012).Over-IndebtednessinMicrofinance–WhoShouldBeartheRisk?JessicaSchicks.CGAP.Schicks, J., & Rosenberg, R. (2011). Too Much Microcredit? A Survey of theEvidenceonOver-Indebtedness.CGAP.

17

Seibel, H. D. (2007). The Role of Microfinance in Rural MicroenterpriseDevelopment.SyngetaFoundationforSustainableAgriculture.Siebel, H. D. (2002). CentenaryRuralDevelopmentBank,Uganda:A Flagship ofRural Bank Reform in Africa. Cologne: University of Cologne, DevelopmentResearchCenter.Servet, J.-M. (2013).Origins and impact of theNoPagomovement in northwestNicaragua.mfi-crisis.Microfinanceincrisis.Steinwand, D. (2000). A Risk Management Framework for MicrofinanceInstitutions.DeutscheGesellschaftfür.The Client Protection Principles. (2016). Retrieved 2016, from The SmartCampaign: http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principlesZipf, G. K. (2012). Human Behavior and the Principle of Least Effort: AnIntroductiontoHumanEcology.