MicroSave Market-led solutions for financial services

The Key Strategic Risk in Microfinance Constrained human capacity at every level (board, management, staff and clients) Requires intensive investment in human resources and systems Training Technical Services

MicroSave India Offices in Lucknow and Hyderabad Applied Microfinance Institute, July 13-24, 2009 ‘Mini’ AMIs every quarter in various locations Nearly 50 professional staff conducting on-site training and technical missions with ‘Action Research Partners’ around India Ongoing programme of research in India leading to curriculum revision/development

Built on Practical Work with a Variety of Types of Financial Institutions

“Good governance is perhaps the single most important factor in eradicating poverty and promoting development.” Kofi Annan, Secretary General, United Nations, 1997-2006

Benefits of Good Governance Trust – the will and the capacity to keep promises to all stakeholders, including clients Clear mission, vision, and relevant values Connection to stakeholders Financial stability

What is the Board’s Role in the Risk Management Program? Ensuring that all material risks are identified. Ensuring that risks are managed within thresholds that are acceptable -- given the MFI’s goals, mission and appetite for risk. Ensuring that management puts in place systems and procedures for ensuring compliance with risk management parameters, as vetted and approved by the board. COSO

What are Board’s Key Responsibilities? Mission and vision: development, focus, and preservation Board management and self governance Executive oversight and management Policy development and approval process Financial and operational oversight and fiduciary responsibility Strategic planning and development

Characteristics of a Board Member Business Sense Microfinance Experience Financial Market Experience Legal and Regulatory Experience Marketing Expertise Public Relations Technology Expertise Operations Expertise Fundraising Experience Ability to discern, to think, to plan and to speak up!

MicroSave Market-led solutions for financial services The Risk Management Approach at MicroSave: Building capacity, supporting systems development and accelerating institutionalization

MicroSave’s Toolkits Toolkits Available: Corporate Brand and Identity Introduction to Microfinance Strategic Business Planning Market Research for MF Costing and Pricing of Products Pilot Testing - Savings Pilot Testing - Loans Roll - Out: Going to scale Loan Portfolio Audit for MFIs Quantitative Research Strategic Marketing Product Marketing Corporate Brand and Identity Customer Service Staff Incentives Scheme HR Management Process Mapping Institutional and Product Risk Management Training of Trainers Individual Lending for Managers Individual Lending for Officers Governance for MFIs

MicroSave’s Toolkits Toolkits Available (cont.): Internal Audit and Controls Basic Financial Accounting Basic Financial Management & Ratio Analysis Delinquency Management for Group-based MFIs Management Information Systems for MFIs Toolkits Under Development: MFI-Out-Of-A-Box Managing Rapid Growth in MFIs Advanced Accounting Advanced HR Management

MicroSave Market-led solutions for financial services Risk Management Tools Process mapping  risk analysis  compliance monitoring  institutionalization Market research  design  product piloting  institutionalization  product roll-out

Process Mapping Process mapping is a powerful tool that can allow MFIs to see the process as it is today, and then imagine what it should be in the future, while reducing risks and improving efficiency. It is a visual representation of a process, that uses symbols and arrows to display: Inputs, Outputs, Tasks performed, and Task sequence.

Process Maps Are Created for Three States “As Is” - The “as-is” state is how the work is currently being performed. “Should Be” - The “should be” state consists of the formally recommended state of performance. In many (if not most) cases the “as is” at the front line in the branches will vary significantly from the “should be”. “Could Be” - The “could be” state is a new level of performance that can be achieved via process redesign. Achieving “could be” is what true reengineering is all about.

Identify Operational Gaps “Should Be” and “Could Be” Maps Creating a Process Map Ten Basic Steps for Mapping a Process Step 1 Step 2 Step 3 Step 4 Identify Operational Gaps Choose Processes Assemble team Define Objectives Step 5 Step 6 Step 7 Step 8 Step 9 Step 10 Gather Data “As Is” Map Analyse “As Is” Map “Should Be” and “Could Be” Maps Share Findings Implement

MicroSave’s Five Phase Product Development Cycle Evaluation and preparation Market research Concept/prototype design Pilot testing Product launch and rollout

Why Focus on New Product Risk? “. . .many of the most common and serious risks are related not to products – as is often assumed by about-to-be-regulated micro-credit institutions – but rather to ownership, management, and institutional capacity to deliver products.” (Marguerite Robinson, Nov 2002)

New Product Development Risks Motivation risk Management/board commitment risk Orphan-product risk Demand risk Positioning risk Product mix risk Competition risk Counterparty risk Operational risk (fraud, technology, management) Delivery systems risk Communication risk

Assess Risks in Product Development The product development team should start with a high level overview of potential risks. Look at internal and external risks, product and institutional risks.

Risk Management Feedback Loop 1. (Re) Identify, (Re) Assess and (Re) Prioritise Risks 2. Develop strategies to manage risks 5. Test effectiveness and evaluate results 3. Develop tactics to mitigate risks 4. Assign responsibility and implement

Tools Available To Assist With New Product Development Risk Analysis New Product Process Tools 1. Evaluation and Preparation Institutional Risk Assessment Institutional Risk Mitigation Cross Product Risk Overview 2. Market Research Market Research for MicroFinance Toolkit 3. Concept/Prototype Design Costing and Pricing Toolkit 4. Pilot Testing Pilot Testing Toolkit Process Mapping Toolkit Product Risk Assessment Product Risk Summary Post Pilot Risk Assessment 5. Rollout Product Rollout Toolkit Pre Rollout Risk Assessment

Key Points To Consider In Institutionalising Risk Management Where within your institution will responsibility for risk management reside? What will be the reporting lines? Selection of the Risk Manager Formulation of a risk management policy Documenting risk management processes in a risk management manual

Institutionalisation in Practice - Risk Management at Equity Bank (1) Shifted to a formal risk management framework Process mapping to identify and mitigate process risks was institutionalized All major product delivery and other institutional processes were mapped and key risks identified

Institutionalisation in Practice - Risk Management at Equity Bank (2) Compliance Department created to oversee: Process mapping Risk management and Compliance managed by an experienced compliance manager. Internal Audit Function strengthened to independently review internal controls

Institutionalisation in Practice - Risk Management at Equity Bank (3) Risk Management Committee constituted, drawn from: Credit Treasury Marketing Finance Operations IT Audit, and Compliance departments as well as CEO and the Board Risk Management Committee meets regularly

1.84 million clients and $34 million profit before tax MicroSave Market-led inputs started here

Applied Microfinance Institute 2009 Jaipur, July 13-24 MFIs’ Stream Process mapping Internal audit and controls Delinquency management Human resource management Bankers’ Stream Financial management Loan portfolio audit Capital structuring and MFI valuation

MicroSave Market-led solutions for financial services B-52 Kapoorthala Crossing, Mahanagar Extension, Lucknow 226006, Uttar Pradesh, India Email: info@MicroSave.net Websites: http://www.MicroSave.org www.India.MicroSave.org