Credit Risk

Credit risk encompasses the risks related to an MFI’s credit activities. It is the most frequently addressed risk by MFIs since it directly affects their main earning asset: the loan portfolio. It includes the risk of financial loss resulting from the inability to collect anticipated interest earnings, or on capital resulting from loan default, as well as the negative social performance resulting from credit activities which do not have the best interest of clients in mind (e.g., a lack of transparency toward the clients, continued lending to over-indebted clients). Two subcategories have been identified within credit risk: credit transaction risk and portfolio risk.

  • Credit Transaction Risk – Credit transaction risk is the risk of financial losses and negative social performance related to loans to clients, caused by inadequate policies regarding loan disbursement, follow-up, and recovery.
  • Portfolio Risk – Portfolio risk is the risk of financial losses and negative social performance related to the composition of the overall loan portfolio, caused by inadequate portfolio diversification.
  • Policies
  • Limits
  • Risk Management Tools
  • Risk Monitoring Tools
Tier 3 Guidelines Tier 2 Guidelines Tier 1 Guidelines
Formal set of credit policies and procedures to manage credit risk, including those covering:
Formal set of credit policies and procedures to manage credit risk, including those covering:
Formal set of credit policies and procedures to manage credit risk, including those covering:
Tier 3 Guidelines Tier 2 Guidelines Tier 1 Guidelines
Tier 3 Guidelines Tier 2 Guidelines Tier 1 Guidelines
Monthly report containing main credit risk indicators, including:
Monthly report containing main credit risk indicators, including:
Monthly report containing main credit risk indicators, including:
Monthly monitoring of provisions, including:
Monthly monitoring of provisions, including:
Monthly monitoring of provisions, including:
  • Policies
  • Limits
  • Risk Management Tools
  • Risk Monitoring Tools