Risk Management in Microfinance

Abstract

The new modern microfinance trend calls for the redesign of microfinance risk management. The literature has paid little attention to risk analysis in microfinance. Moreover, it has focused mainly on credit risk and fraud risks. But the particular nature of microfinance, the complexity of modern financial structures, the variety of beneficiaries and institutions involved require a more structured approach of risk management. This chapter aims to lay the basis for a risk management model that could fit modern microfinance. In order to achieve this, the first step is to set a taxonomy of risk for microfinance. The idea is to make an overview of the different risks and to catalogue them according to the typical risk categories defined by banking regulation, with particular reference to the new Capital Accord of Basel II, which aims to ‘secure international convergence on revisions to supervisory regulations governing the capital adequacy of international active banks’ (Basel Committee on Banking Supervision, 2004a).