Alienation between microfinance lenders and borrowers creates risks

Wednesday, October 13, 2010, 18:01
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Microfinance Focus, Oct 13, 2010: Microfinance institutions in many countries have recently faced severe challenges in terms of portfolio quality resulting from both internal and external factors. The sector is encountering significant obstacles in terms of over indebtedness, portfolio management issues, the global financial crisis and the wider credit environment

For a sector which has a double bottom line, the need to manage social impact with financial viability is viewed as an important step towards mitigating portfolio risks. Speaking on a panel at the Asia Microfinance Forum, Mr. Bai Chengyu, Secretary General, China Association of Microfinance said, “Alienation of these objectives creates risks. These alienation can be in the form of treating clients as consumers of financial services and not as partners, putting field clients in the backlist, cutting of defaults and covering it up with high interest rates or stimulating loan needs for expanding portfolio”.

“For controlling the risks, we need to invest in microfinance as social business, implement social performance management and integrate the risk into the social framework” he added.

Maud Savary-Mornet, Deputy Head, PlaNis, France remarked, “Microfinance has gained strong resilience which has given hope that it will be not affected by any crisis but still experiences show that MFIs have been under severe stresses”.

“For managing our risk portfolio we need to have an adequate risk methodology, diversification of risks, recovery process and policy for provision. It is also important to have a credit bureau in every country”, she added.

A good MIS in place, proper Human Resource policies, internal audit and social performance management are some of the things that microfinance institutions need to focus upon for managing risks, Ms. Maud told the audience.

Sharing his experience about the rapid growth of microfinance in Cambodia, Sok Voeurn, Chief Operations Officer, Thaneakea Phum Cambodia said although the industry was affected in 2009-10 due to global meltdown, there were internal factors like decreased availability of funds, weak local systems, lack of transparency by some MFIs in lending practices and lack of information sharing also played a role in the slow down.

As a measure to reduce the risks, Mr. Thaneakea said, “We try to focus on customers first and then develop suitable and diversified products that to the need of the customers. In the coming year we’ll also be having an operational credit bureau which we think is very important for information sharing and risk controlling”.