At a recent workshop on sustainable interest rate setting and risk management in microfinance institutions, International Finance Corporation senior risk management specialist Andrew Pospielovsky said that Vietnam’s microfinance risk management remained weak and that was one of the main challenges they would confront during their transformation into licensed microfinance institutions and growth process.
He said Vietnam’s microfinance institutions should apply seven principles of risk management as many other foreign advanced nations were doing.
Microfinance institutions must identify, assess and measure risks. Accordingly they must estimate potential loss associated with each specific risk if poorly managed. This is related to the need to differentiate the risks, keep different risks in perspective and understand what risks to prioritize.
Microfinance institutions must also know how to mitigate and limit risks. The easiest way to mitigate a risk is to avoid doing the business activity that generates that risk, he said.
“The first step to limit risks is to define what business activity you will and will not do, from the perspective of what risks you are prepared to take on,” Pospielovsky said. “Limitations are not just with regards to products, but also to whom – to which client segments.”
Microfinance institutions must also create control systems and build controls and limits into their monitoring systems as much as possible.
He said the systems needed to be tested on an ongoing basis.
Microfinance institutions must also formalize their limits, controls and systems in policies and procedures. After that they should conduct implementation of the risk management systems.
Finally, they must also test, monitor, review and improve their risk management systems, controls and limits. Risk drivers include business, market and macro-economic environment and staff expertise. Therefore, risk management systems, controls, limits, policies and procedures also needed continual development, he said.
“Risks that threaten the financial viability for the microfinance institutions, such as credit risk or liquidity risk, should generally be reviewed on at least a monthly basis by senior management. Others may be reviewed quarterly or semi-annually, including by board of management and board of directors,” Pospielovsky said.
Speaking about the issue of interest rate setting in microfinance institutions, Nguyen Thi Tuyet Mai, director of the Vietnam Microfinance Working Group – a network of microfinance institutions and practioners said the current interest rate caps would make microfinance institutions less sustainable to serve the low-income clients. If these microfinance institutions stopped offering convenient and cheap financial services to the poor, low income people had to approach money lenders at excessive interest rates of about 100 per cent, per year.
She compared commercial banks and microfinance institutions to prove that the client’s the borrowing cost for a loan from microfinance institutions was cheaper.
Recently, the State Bank of Vietnam has issued several circulars putting an interest rate cap for credit institutions including microfinance institutions.
Sharing global experiences on this topic, Eric Duflos, CGAP Representative for Asia and Pacific Region has emphasized the fact that 50 per cent of adults are unbanked in the Asia.
“We also need to consider about the majority of poor customers who were not served by the banks, so they caught off guard against seduction tactics of black creditors,” he said.
Duflos also shared with all workshop participants the comparison among some countries in Asia to indicate that current interest rates charged by Vietnamese microfinance institutions were relatively low. In conclusion, he made a recommendation to remove interest rate cap on microfinance institutions in order to develop a sustainable microfinance sector in Vietnam.
(Posted by Vietnam Investment Review)