Strategic Risk encompasses the risk of financial losses and negative social performance related to the strategic direction of the institution. Two subcategories have been identified within strategic risk: governance risk and strategic risk.
- Governance Risk– Governance risk is the risk of financial losses and negative social performance related to inadequate governance or poor governance structure.
- Strategic Risk– Strategic risk encompasses the risk of financial losses and negative social performance related to the strategic direction of an institution. This includes strategic aspects such as the institution’s mission, vision, strategic plan, and mission alignment amongst shareholders. One of the most important aspects of strategic risk concerns the potential of an MFI to experience mission drift.
Credit Risk
Organizational Foundation
Governance Risk
- Policies
- Limits
- Risk Management Tools
- Risk Monitoring Tools
| Tier 3 Guidelines | Tier 2 Guidelines | Tier 1 Guidelines |
|---|---|---|
Commitment to manage governance risk | Formal set of policies and procedures to manage governance risk, including: | Formal set of policies and procedures to manage governance risk, including: |
•Up-to-date elections regulations | •Up-to-date elections regulations | •Up-to-date elections regulations |
• Participation of members of Board of Directors (BoD) in credit committee | • Participation of members of BoD in credit committee | |
• Participation of members of BoD in risk committee or ALCO | • Participation of members of BoD in risk committee or ALCO | |
• Participation of members of BoD in audit committee | • Participation of members of BoD in audit committee | |
• Internal work regulations | • Internal work regulations | |
• Travel and subsistence regulations | • Travel and subsistence regulations | |
• Code of ethical conduct | • Code of ethical conduct | |
• Succession plan for CEO and key personnel | • Succession plan for CEO and key personnel | |
• Policies for the management of conflicts of interests | ||
Balance between the financial and social strategies provided by the BoD | Balance between the financial and social strategies provided by the BoD | Balance between the financial and social strategies provided by the BoD |
Financial statements closed within three months after the month’s cut-off date | Financial statements closed within three months after the month’s cut-off date | Financial statements closed within three months after the month’s cut-off date |
Annual external audit | Annual external audit | Annual external audit by renowned firm |
Risk rating in line with regulation | Biennial risk rating | Annual risk rating |
Biennial social rating | ||
SMART Certification for client protection |
| Tier 3 Guidelines | Tier 2 Guidelines | Tier 1 Guidelines |
|---|---|---|
Limits on the composition of the BoD | Limits on the composition of the BoD | Limits on the composition of the BoD |
• Composed of 5 to 9 members | • Composed of 5 to 9 members | • Composed of 5 to 9 members |
• At least 50 percent of members are professionals and 30 percent have a socially-focused background | • At least 50 percent of members are professionals and 30 percent have a socially-focused background | |
At least quarterly BoD meetings | At least quarterly BoD meetings | At least quarterly BoD meetings |
| Tier 3 Guidelines | Tier 2 Guidelines | Tier 1 Guidelines |
|---|---|---|
Mapping of governance risks (at least every two years) | Mapping of governance risks (at least every two years) | Annual mapping of governance risks |
Clearly communicated performance expectations and lines of accountability for CEO | Clearly communicated performance expectations and lines of accountability for CEO | Clearly communicated performance expectations and lines of accountability for CEO |
Information flow to the BoD | Information flow to the BoD | Information flow to the BoD |
• Structured management report, or financial statements, basic portfolio report, and quarterly report on fulfillment of operational plan | • Structured management report, or financial statements, basic portfolio report, and quarterly report on fulfillment of operational plan | • Well-structured management report that includes a summary of the reports presented to the committees |
• Quarterly report of social indicators | • Monthly report of social indicators including an analysis of the risk of mission drift | |
• Information validated by independent area (internal audit, system, or accounting) | ||
Training of members of the BoD based on training plan | Training of members of the BoD based on training plan and auto-evaluation of the BoD, with dedicated budget | |
Annual auto-evaluation of the BoD and elaboration of an action plan | ||
Shareholders’ Agreement, including explicit and clearly defined social goals/indicators | ||
Annual review of conflicts of interest | Annual review of conflicts of interest |
| Tier 3 Guidelines | Tier 2 Guidelines | Tier 1 Guidelines |
|---|---|---|
Annual auto-evaluation of the BoD and elaboration of an action plan |
Strategic Risk
- Policies
- Limits
- Risk Management Tools
- Risk Monitoring Tools
| Tier 3 Guidelines | Tier 2 Guidelines | Tier 1 Guidelines |
|---|---|---|
Commitment to manage strategic risk | Formal set of policies and procedures to manage strategic risk | Formal set of policies and procedures to manage strategic risk |
| Tier 3 Guidelines | Tier 2 Guidelines | Tier 1 Guidelines |
|---|---|---|
Not applicable | Not applicable | Not applicable |
| Tier 3 Guidelines | Tier 2 Guidelines | Tier 1 Guidelines |
|---|---|---|
Mapping of strategic risks (at least every two years) | Mapping of strategic risks (at least every two years) | Annual mapping of strategic risks |
Business plan | Business plan | Business plan |
Operational plan | Operational plan | Operational plan (consolidated and by department) |
Mission | Mission | Mission |
Individual goals and objectives for field personnel | Individual goals and objectives for field personnel | Individual goals and objectives for all personnel |
Financial projections with 3–5 year horizon and reviewed annually | Financial projections with 3–5 year horizon, reviewed annually and based on different scenarios | |
Definition of social objectives | Definition of social objectives | |
Annual client satisfaction surveys and feedback for product development | Quarterly client satisfaction surveys and feedback for product development | |
Social performance management system |
| Tier 3 Guidelines | Tier 2 Guidelines | Tier 1 Guidelines |
|---|---|---|
Systematic monitoring of fulfillment of goals and objectives—both institutional and individual | Systematic monitoring of fulfillment of goals and objectives—both institutional and individual | Systematic monitoring of fulfillment of goals and objectives—both institutional and individual |
Systematic monitoring of external business environment, including: | Systematic monitoring of external business environment, including: | Systematic monitoring of external business environment, including: |
• Market studies monitoring institutional competitiveness vis-à-vis competitors’ product offering | • Market studies monitoring institutional competitiveness vis-à-vis competitors’ product offering | • Market studies monitoring institutional competitiveness vis-à-vis competitors’ product offering |
• Benchmark analysis | • Benchmark analysis | • Benchmark analysis |
Annual drop-out analysis (levels, reasons, and trends) | Quarterly client drop-out analysis (levels, reasons, and trends) | |
Participation in microfinance networks | Participation in microfinance networks |
