The Risk management Initiative in Microfinance (RIM) is an industry-wide platform which contributes to the development of awareness, best practices, and appropriate standards for risk management in microfinance globally. RIM was founded in February 2013 by Appui au Développement Autonome (ADA), Calmeadow, Center for Financial Inclusion at Accion (CFI), Mennonite Economic Development Associates (MEDA), MFX Solutions, Microfinanza, Oikocredit, and Triple Jump.
RIM’s Risk Management Graduation Model is a pathways-based, best practice standard for risk management in the microfinance sector. The Risk Management Graduation Model has been designed to bridge the gap between the current state of risk management systems, tools, practices, and required capabilities and that of the more sophisticated approaches proposed by the Basel Committee for Banking Supervision (BCBS). Through a diagnostic process, MFIs can assess their current risk management systems, structures, and capabilities against RIM’s Risk Management Graduation Model and determine their adherence to best practice risk management standards applicable to their institutional tier level.
MFIs engage with the RIM Risk Management Graduation Model standards through a diagnostic process using the RIM Risk Management Diagnostic Scoring Tool. As an output of the diagnostic process, an MFI’s scoring results are displayed in summary graphic form as well as providing a detailed gap analysis of actual performance against Risk Management Graduation Model standards. An MFI then has transparency with respect to its adherence to best practice risk management standards in each risk area and is placed in the best position to develop and strengthen relevant risk areas in line with the strategic direction of the business.
RIM aims to provide MFIs with a scalable framework for microfinance risk management. RIM will direct MFIs to best practice tools, policy examples, and services providers to assist in the risk management development process. In time, it is RIM’s goal to develop specialized tools, policy examples, and resources for each Risk Management Graduation Model risk area as well as within each institutional tier level.
With proper adherence to the Risk Management Graduation Model standards, an MFI may experience the following benefits:
- Cost-savings through focused, more efficient, allocation of resources towards the Risk Management function
- Achieving transparency of your institution’s risk management graduation pathway
- Alignment to a global risk management benchmark
- Ability to proactively plan for risk management capacity requirements
- Greater continuity in risk management capacity building due to internationally-accepted risk management framework
- Clear communication to stakeholders about level of seriousness given to internal risk management priorities
- An improved institutional risk profile as viewed by potential investors and regulators
Undergoing a RIM Risk Management Diagnostic Scoring Tool exercise will benefit an MFI in the following ways:
- Through a gap analysis, an understanding is established of where the institution stands with respect to international standards for an institution of a certain tier level
- An institutional risk management development pathway will be established enabling a proactive approach to risk management in all functional areas of an institution
- A more sustainable, effective, and timely roll-out of technical assistance and capacity building activities can be carried out – ensuring that institutional resources are not unnecessarily undertaken on activities which are outside of the current level of institutional development.
Technical Service Providers:
Technical services providers trained on the RIM Risk Management Diagnostic Scoring Tool can benefit by conducting all or applicable elements of the diagnostic process at the commencement of technical assistance or capacity building project activities. The Risk Management Diagnostic Scoring Tool outputs will assist technical services providers in determining project priorities in which services provided are best targeted through an objective diagnostic process which matches capacity building needs to the tier level of the institution.
Investors (MIVs, DFIs, banks, shareholders):
Investors can benefit from RIM’s Risk Management Graduation Model through its implementation within technical assistance and capacity building activities they actively promote or finance within their investment portfolio. Once a Risk Management Graduation Model diagnostic exercise has been carried out within a portfolio institution, an investor will be better equipped to support the development of risk management activities which move an MFI towards Risk Management Graduation Model adherence, ultimately ensuring a balanced and comprehensive approach to risk management is being undertaken by their investees. Stronger, and more suitable, internal risk management frameworks reduce credit risk to investors and protects shareholder investment in the institution.
Regulators can benefit from RIM’s Risk Management Graduation Model by experiencing lower microfinance sector risk through ensuring that individual MFIs properly adopt the RIM Risk Management Graduation Model as a risk management standard. Regulators can aggregate individual Risk Management Graduation Model Diagnostic Scoring Tool result to derive a comprehensive, aggregate risk management snapshot of a given country. Promoting RIM’s Risk Management Graduation Model within their local microfinance industry directly or through country-level microfinance associations can help prioritize sector-wide capacity building programs or standards development.
Microfinance networks can benefit from RIM’s Risk Management Graduation Model through using the model as a standardization mechanism at the network-level. Through the use of RIM’s Risk Management Graduation Model, network-level risk management capabilities can be assessed, expectations communicated, and financial and technical human resources most efficiently allocated through the use of an objective and standardized approach to risk management capacity building. Microfinance networks can aggregate network-wide Risk Management Graduation Model Diagnostic Scoring Tool results to derive a comprehensive, aggregate risk management snapshot of their entire network.
RIM’s Risk Management Graduation Model is currently being piloted within a number of MFIs around the world by members of RIM’s Technical Working Group as well as the Risk Management Graduation Model Development Team. Once the model is complete, RIM aims to have it implemented as a: 1) Self-diagnostic tool, or 2) Diagnostic process carried out by an objective, RIM-Certified third party consultant.
RIM’s goal is to refine the Risk Management Graduation Model based on recent developments in the microfinance industry so as to keep the model relevant and up-to-date. Similarly, RIM aims to provide the microfinance industry with standardized Risk Management Graduation Model compliant toolkits, policy examples, and how-to guides for each risk area and for each tier-level of MFIs. Furthermore, RIM strives to provide these resources to the industry free of charge and in multiple languages.
Once the RIM Risk Management Graduation Model Diagnostic Scoring exercise has been carried out, an MFI will need to determine how to improve its risk management systems, structures, and capabilities. This can be done by improving internal personnel skillsets, hiring new staff, or working through external resources such as individual risk management consultants or risk management consulting firms. Through its website, RIM aims to promote suitable risk management service providers and a talent pool under each risk area and tier category so that MFIs are provided with visibility on risk management service providers available to service their needs. It is a long-term goal of RIM to create a pool of regionally-based RIM-Certified experts, trained and qualified in the Risk Management Graduation Model diagnostic process and associated toolkits.
RIM is an industry platform which promotes the adoption of risk management standards. RIM has developed the Risk Management Graduation Model, an industry standard in risk management practices for various risk areas and tier-levels of MFIs. RIM’s Risk Management Graduation Model is implemented through carrying out a diagnostic process using the Risk Management Graduation Model Diagnostic Scoring Tool which ranks MFI internal risk management systems, structures, and practices against industry-recognized standards. Once an MFI understands where they rank within the Graduation Model framework, they are in the best position to source consulting and advisory services to adequately meet their detailed risk management needs.
Many MFIs have grown their balance sheets very quickly without adequate risk management systems and structures in place to sustainably manage that growth. While on the surface an MFI may seem like a Tier 1 institution from a Total Assets perspective, from a risk management perspective many of these institutions employ risk management practices which do not match their level of institutional development. The purpose of the Risk Management Graduation Model is to align risk management practices with levels of institutional development.