RISKS

IN

PORTFOLIO

Maintaining a quality portfolio is not that simple as it is exposed to different risks. The MFI must balance a wide range of different types of risk within its portfolio. Common risks shall include:

1. Credit Risk

This risk arises as a result of the client's unwillingness or inability to repay their loans. Credit risk results in a deterioration of the portfolio of the MFI reduced revenues and increased operating costs.

2. Interest Rate Risk

any change in the market interest rate level during the loan term relates to the interest rate risk. This risk stems from the mismatch between the maturity of the assets and liabilities of the MFI and particularly significant for those MFIs that rely on savings deposits or commercial sources of financing;

7 Types of Interest Rate Risk :

Simple interest
Compound interest
Effective Interest
Fixed interest
Variable interest
Real interest
Accrued interest

3. Liquidity risk

It is the MFI's difficulty in obtaining the required cash at a reasonable cost.

EXAMPLE:

Inability to meet short term debt.
Unable to meet proper funding within a specific time-frame.
Rise of material causes rises in manufacturing expense for the concern.

The largest source of risk for any financial institution is its portfolio of loans. The loan portfolio is the largest asset of the microfinance institution (MFI). Additionally, it may be quite difficult to measure the quality of that asset, and therefore the risk it poses to the institution. For MFIs whose loans are not usually backed by bankable collateral, the portfolio's quality is crucial. Fortunately, many MFIs have learned how to maintain very high-quality loan portfolios. Indeed, leading MFIs typically outperform commercial banks' peers in many countries.

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