Assess the adequacy of the bank’s systems to manage the risks associated with lending activities, and management’s ability to implement effective due diligence, monitoring, and reporting systems. All these materials and systems have been tested and implemented in MSME Banks and MFIs with assets ranging from as little as USD 1 million to USD 1 billion.Objective. We implement comprehensive Risk Management Frameworks or support our customers in developing specific risk-related measures, such as statistical scorecards, disaster recovery plans, or the implementation of an Assets and Liabilities Committee (ALCO).īased on our longstanding experience, we have developed a comprehensive set of tools and templates which we can use as templates for preparing and implementing best-practice risk management systems. LFS is experienced in training and coaching risk managers, in identifying, evaluating, mitigating and monitoring risks, as well as in communicating risks and in writing structured risk assessment reports. Thus, risk managers in FIs focus on the mitigation of operations and credit risks without neglecting the presence and increasing importance of the other risk categories. The LFS approach distinguishes between six different risk categories, including Credit Risk, Operations Risk, Market Risk, Compliance Risk, Strategic/Governance Risk, and Social Risk (see Box 1).Īlthough a number of risk categories have recently been newly identified (such as technology risks) and/or gained importance (such as compliance or social risks), operations risks and credit risks remain the single most important types of risks for Financial Institutions (FIs). LFS has been supporting numerous MSME Banks and non-bank MSME Finance Institutions worldwide in developing or enhancing their risk management frameworks. In many cases, the latter requires a lengthy process of creating a risk culture among all employees of a Financial Institution.ġ: Operational Risks - Process Risk, People Risk, Fraud Risk, Reputational Risk, External Risk and Information Security / Data Protection RiskĢ: Credit Risks - Credit Transaction Risk and Portfolio Riskģ: Market Risks - Liquidity Risk, Foreign Currency Risk, Investment Portfolio Risk and Capital Adequacy Ratio RiskĤ: Compliance Risks - Legal Risk, Regulatory Risk and Know-Your-Customer (KYC)ĥ: Strategic and Governance Risk - Strategic Risk, Governance Risk and Technology risk Often, risk managers in MFIs do not have a good practical oversight of their role and tend to focus on one or two areas of risk management or produce reports that are required by central banks, investors, refinancers or other stakeholders, but are not used by management to mitigate risks efficiently. LFS’ international experience in the field of Risk Management has shown that it is not sufficient to send one staff member to a two weeks training course and call him a Risk Manager.
LFS has recognized that investors and regulators have been putting an increasingly strong focus on implementing and maintaining a solid risk management framework in Financial Institutions. As the MSME industry has been growing, professionalizing and melting with banks and Fintechs, the need for a proper risk management function has arisen.
MFIs have long been able to manage their business without separate risk departments. Traditional Bankers and Risk Managers often find it difficult to accept that MSME financiers follow an integrated approach in managing credit risks, operations and sales.
Compared to the traditional banking sector, the MSME Finance industry has adapted explicit Risk Management Systems at a rather late development stage.
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