Risk comes from the vulgar latin ‘rescum’ which can be said to mean ‘risk’ or ‘danger’. Risk is, in fact the uncertainty related to future event or

future outcomes.

A TAXONOMY OF RISKS FOR MICROFINANCE

Managerial Risks

Liquidity Risk

Credit Risk

Market Risk

Process Risk

Operational Risk

Residual Risks

Business Risk

Specifik Risk

Generic Risk

Financial Risk

The business RiskBusiness risk can be split into two components;Specific risk (Product risk) ; this risk arises

from the product and services offered.Generic risk ; this risk derives from the

location of the program

Financial RiskFinancial Risk are classified as;Liquidity riskCredit RiskMarket Risks

1.Liquidity Risk is the risk arising from change in cash flow. It can be definedas the risk of not having cash to meet obligation, as well as the price or theopportunity cost or loss to bear in order to obtain cash

The risk of liquidity management has aquantitative impact and a qualitative one.

The liquidity risk can be expressed by equation as follows ;CCFt = (ENC+EDC) + (UNC+UDC)

where :CCFt : cash flow change in period t ENC : Expected non-discretionary changeEDC : Expected discretionary change UNC : Unexpected non-discretionary change UDC : Unexpected discretionary change

Defined as the risk that the borrower will not pay back interest

and /or principal.

Credit Risk Determined by two

components :The Expected

Loss(EL)

Unexpected Loss(UL) Estimating future values

of EL & UL is useful for forecasting the possible value of future losses

the estimate of EL related to credit exposure requires the evaluation of three variables :

AE (the adjusted exposure)PD (probability of default)LGDR(loss given default rate)

EL = AE x PD x LGDR

Credit risk management :Single loan { EL & UL }Loan Portfolio { EL & UL }

Single loanEL (expected loss)

1. Creditworthinessanalysis: qualitative credit scoring models

2. Risk sharing

UL (unexpected loss)1. Monitoring process2. Risk transfer

Loan portfolioEL (Expected Loss)

1. Creditworthiness analysis2. Portfolio size3. Risk sharing

UL (Unexpected loss)1. Monitoring process2. Portfolio size3. Portfolio diversification4. Risk transfer

Market Risks Market risks are those risks arising from a

change in market variables, typically interest rates ang exchange rates, that may negatively or positively affect the net profitability of a project or an institution

Process Risks Process risks can be

distinguished into two main catogories :Operational risk Residual risk

1. Operational Risk Internal Factors:

ProcessPeopleSystem

External factorsLegal risksCoup d’etatothers

2. Residual RiskExternal events not included in operational risksCatastropic risksTerrorist risksReputational risks

Enough Already. Thank You