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  • Managing Risk and Creating Value with Microfi nance is available as an interactive textbook at Th e electronic version allows communities of practice, colleagues working in sectors and regions, and students and teachers to share notes and related materials for an enhanced, multimedia learning and knowledge-exchange experience.

  • iiiManaging Risk and Creating Value with Microfinance



    Mike Goldberg and Eric Palladini


  • 2010 The Interna onal Bank for Reconstruc on and Development / The World Bank1818 H Street NWWashington DC 20433Telephone: 202-473-1000Internet: www.worldbank.orgE-mail:

    All rights reserved

    1 2 3 4 13 12 11 10 This volume is a product of the staff of the Interna onal Bank for Reconstruc on and Development / The World Bank. The fi ndings, interpreta ons, and conclusions expressed in this volume do not necessarily refl ect the views of the Execu ve Directors of The World Bank or the governments they represent.

    The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denomina ons, and other informa on shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

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    The material in this publica on is copyrighted. Copying and/or transmi ng por ons or all of this work without permission may be a viola on of applicable law. The Interna onal Bank for Reconstruc on and Development / The World Bank encourages dissemina on of its work and will normally grant permission to reproduce por ons of the work promptly.

    For permission to photocopy or reprint any part of this work, please send a request with complete informa on to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet:

    All other queries on rights and licenses, including subsidiary rights, should be addressed to the Offi ce of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail:

    ISBN: 978-0-8213-8228-8eISBN: 978-0-8213-8235-6DOI: 10.1596/978-0-8213-8228-8

    Library of Congress Cataloging-in-Publica on Data

    Goldberg, Mike, 1956-Managing risk and crea ng value with microfi nance / by Mike Goldberg and Eric Palladini. p. cm.Includes index.ISBN 978-0-8213-8228-8 -- ISBN 978-0-8213-8235-6 (electronic)1. Microfi nance. 2. Risk management. I. Palladini, Eric, 1956- II. Title. HG178.3.G65 2010332--dc22


    Cover photos: Curt Carnemark and Julio Pantoja/The World Bank; Larry Mayorga/Pic onary Studio (top le and center) Book/book cover design: Larry Mayorga/Pic onary Studio

  • vManaging Risk and Creating Value with Microfinance


    Preface ixAcknowledgments xi About the Authors and Contributors xiiiAbbrevia ons xvii

    1 Risk Management: Preparing for the Unexpected 1 Risk Categories 3 Management of the Biggest Risks 5 Producer Risks 7 Addi onal Risks for MFIs with Rural Por olios 8 Development of a Risk Management System 10 Steps in Risk Management 11 Approaches to Managing Risks 132 Good Governance: Managing Internal Risk 17 Ownership, Legal Form, and Their Impact on Governance 19 NGOs 20 Private Investors 20 Government 21 External Public En es and Aid Agencies 22 Microfi nance Investment Vehicles 22 MFIs in Transforma on 22 The Board of Directors: Func onal Responsibili es 23 The Board of Directors: Eff ec ve Structure 26 The Board of Directors: Eff ec ve Processes 28 The Board of Directors: Member Selec on and Par cipa on 32 Summary and Conclusions 353 Interest Rates: Paying for Risk 39 Introduc on 41 Interest Rate Se ng 41 Are Microfi nance Interest Rates Too High? 43 Lowering Interest Rates at the Ins tu onal Level 44 Lowering Interest Rates through Government Policy 45 Conclusion 484 Microinsurance: An cipa ng Client Risks 51 Insurance Products and Low-Income Clients 53 Design of the Product for Low-Income Markets 53 Microinsurance for Rural Clients 56 Delivery of the Product 57 How Does La n America Fare in Microinsurance Coverage? 59 MFIs and the Barriers to Mainstreaming Microinsurance 60 Conclusion 625 Progressive Housing Microfi nance: Building One Room at a Time 65 The Housing Microfi nance Approach 67 Ins tu onal Changes 69 Subsidies 69

  • vi Contents

    The Role of Government and Risk Management 70 Examples from La n America 70 Lessons Learned 72 Designing a New Housing Microfi nance Program 736 Microleasing: Overcoming Equipment-Financing Barriers 77 The Basics of Microleasing 79 Advantages of Leasing for Microbusinesses 79 Advantages of Microleasing for the MFI 80 Tax and Regulatory Considera ons with Microleasing 81 Management of Microleasing Risks 82 Use of Microleasing in La n America 82 Recommenda ons for a New Microleasing Program 847 Disaster Management: Preparing for the Worst 87 An Unfortunate but Common Story 89 Costs of Disasters 89 Proac ve Approaches and Concrete Responses 91 Conclusion 978 New Technologies: Providing a Path to Lower Costs and New Products 101 Introduc on 103 Why Technology Ma ers 103 Mobile Banking 104 Network Systems 105 Remote Data Processing 106 PDAs 106 POS Terminals 107 Biometrics 108 Costs, Risks, and Challenges 109 Conclusion 111

    Glossary 115

    Index 117

    BOXES1.1 Basel Commi ee: Interna onal Standards and Prac ces for Risk Management 101.2 Risk Measurement Systems 132.1 Investors as Board Members 212.2 Ques ons to Assess the Implica ons of an MFIs Ownership Structure 232.3 The Board and Social Performance Management 242.4 Evalua ng Board Performance 252.5 Some Dos and Donts for Boards 272.6 Sample Board Mee ng Agenda 292.7 A Case Study: The Dominican Integrated Development Ins tute 312.8 Responsibili es and Standards of Conduct for Board Members 343.1 Microcredit Cost Structure 44

  • viiManaging Risk and Creating Value with Microfinance

    3.2 Eff ects of Subsidized Interest Rates 464.1 The Mechanisms of a Weather-Indexed Insurance System 574.2 Mapfre Seguros: Microinsurance in Brazil 614.3 FINSOL: Life and Funeral Insurance in Mexico 615.1 Can Gender Be a Factor in a Housing Microfi nance Program? 736.1 CECAMs Expanded Menu of Leased Equipment for Rural Producers 807.1 Catastrophe Risk DDO 947.2 Buro-Tangail Con ngency Fund, Bangladesh 947.3 Loan Product Adjustments for Disasters: The Case of the Bangladesh Rural Advancement Commi ee (BRAC) 957.4 Katalysis: Response to Disasters 968.1 Minimum Requirements for a POS Device 1088.2 Regulatory and Policy Guidelines for Branchless Banking 110

    FIGURES3.1 Percentage Components of Real Interest Rates, 200405 424.1 Tradi onal and Poten al Insurance Markets 544.2 Demand for Insurance: Risk Management Needs of the Poor in 11 Countries, 200206 567.1 Cycle of Risk Management 928.1 Penetra on of Services and Technologies 1048.2 Por olio Expansion and PDA Use 1078.3 PDA Use and Por olios at Risk 107

    MAP4.1 Microinsurance Coverage in La n America, 2007 60


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