Performance Risk
Performance Risk Types & Definitions
Performance risk is the risk of inefficiencies related to capital or performance constraints. Although correlations exist between the different risk categories, performance risk is more transversal than the previous risk categories, since the performance itself should be built on the previously mentioned risk categories, as a balance between return and risk appetite.
• Capital Adequacy – Capital adequacy risk refers to the capacity of an institution’s equity capital to absorb risk.
• Performance Risk – Performance risk refers to the risk of inefficiencies caused by an MFI’s inadequate financial and social performance.
• Profitability – Profitability refers to an MFI’s capacity to maintain or increase its current level of capital adequacy and attract new investors and shareholders, while maintaining its social performance. This category includes financial leverage risk.
• Financial Management – Financial Management refers to an MFI’s capacity to manage its assets and liabilities in an optimal manner, not only minimizing risks as mentioned in the Financial Risk category, but also maximizing the return of its assets.
• Efficiency and Productivity – Efficiency and productivity refer to an MFI’s capacity to reach its financial and social objectives in a cost-efficient manner.
• Social Results – Social results refers to an MFI’s capacity to reach its social objectives as determined within its strategic business plan.
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Capital Adequacy and Financial Leverage
Policies
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Formal policies on dividend distribution | Formal policies on dividend distribution | Formal policies on dividend distribution |
Limits
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Minimum percentage of annual profits to be capitalized | Minimum percentage of annual profits to be capitalized | Minimum percentage of annual profits to be capitalized |
| Limits and alert levels for capital adequacy levels | Limits and alert levels for capital adequacy levels | Limits and alert levels for capital adequacy levels |
| • Debt-to-equity ratio | • Debt-to-equity ratio | • Debt-to-equity ratio |
| • Adjusted equity with respect to risk-weighted assets | ||
| • Stress-test limits |
Risk Management Tools
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| No specific guidelines | No specific guidelines | No specific guidelines |
Risk Monitoring Tools
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Monthly monitoring of capital adequacy levels and trends | Monthly monitoring of capital adequacy levels and trends | Weekly monitoring of capital adequacy levels and trends |
| • Debt-to-equity ratio | • Debt-to-equity ratio | • Debt-to-equity ratio |
| • Adjusted equity with respect to risk-weighted assets | ||
| • Compared to limits and projections | • Compared to limits and projections | |
| • Stress-testing |
Profitability
Policies
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| No specific guidelines | No specific guidelines | No specific guidelines |
Limits
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Internal limits and alert levels for profitability indicators | Internal limits and alert levels for profitability indicators | Internal limits and alert levels for profitability indicators |
| • Return on equity (ROE) | • Return on equity (ROE) | • Return on equity (ROE) |
| • Return on assets (ROA) | • Return on assets (ROA) | • Return on assets (ROA) |
| • Operational self-sufficiency (OSS) | ||
| • Profit margin | ||
| • Maximum return on equity (ROE) |
Risk Management Tools
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| No specific guidelines | No specific guidelines | No specific guidelines |
Risk Monitoring Tools
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Monthly monitoring of profitability indicators (ROE and ROA) | Monthly monitoring of profitability indicators (ROE and ROA) | Monthly monitoring of profitability indicators (ROE, ROA, OSS, profit margin) |
| • Trend analysis | • Trend analysis | • Trend analysis |
| • Compared to limits and projections | • Compared to limits and projections | |
| • Stress-testing |
Financial Management
Policies
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Formal set of policies and procedures for optimal financial management | Formal set of policies and procedures for optimal financial management | Formal set of policies and procedures for optimal financial management |
| • Policies and procedures mentioned in “Liquidity Risk” and “Market Risk” | • Policies and procedures mentioned in “Liquidity Risk” and “Market Risk” | • Policies and procedures mentioned in “Liquidity Risk” and “Market Risk” |
| • Policies based on the behavior of key variables (for example deposits, interest rates, foreign currency) for optimal return | • Policies based on the behavior of key variables (for example deposits, interest rates, foreign currency) for optimal return |
Limits
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Limits mentioned in “Liquidity Risk” and “Market Risk” | Limits mentioned in “Liquidity Risk” and “Market Risk” | Limits mentioned in “Liquidity Risk” and “Market Risk” |
| Limit of asset concentration on core business | Limit of asset concentration on core business | |
| • Net portfolio over total assets | • Net portfolio over total assets | |
| • Unproductive assets over total assets | • Unproductive assets over total assets |
Risk Management Tools
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Specific risk management tools mentioned in “Liquidity Risk” and “Market Risk” | Specific risk management tools mentioned in “Liquidity Risk” and “Market Risk” | Specific risk management tools mentioned in “Liquidity Risk” and “Market Risk” |
Risk Monitoring Tools
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Risk monitoring tools in “Liquidity Risk” and “Market Risk” | Risk monitoring tools in “Liquidity Risk” and “Market Risk” | Risk monitoring tools in “Liquidity Risk” and “Market Risk” |
Efficiency and Productivity
Policies
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| No specific guidelines | No specific guidelines | No specific guidelines |
Limits
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Internal limits and alert levels for efficiency and productivity indicators | Internal limits and alert levels for efficiency and productivity indicators | Internal limits and alert levels for efficiency and productivity indicators |
| • Operating expenses ratio with respect to gross portfolio and assets | • Operating expenses ratio with respect to gross portfolio and assets | • Operating expenses ratio with respect to gross portfolio and assets |
| • Personnel expenses ratio with respect to average gross portfolio and average assets | ||
| • Administrative expenses ratio with respect to average gross portfolio and average assets | ||
| • Cost per loan lent | • Cost per loan lent | |
| • Cost per borrower | • Cost per borrower | |
| • Cost per member | ||
| • Staff allocation ratio | ||
| • Loan officer productivity (borrowers) | • Loan officer productivity (borrowers) | • Loan officer productivity (borrowers and amount) |
| • Staff productivity (borrowers and amount) | ||
| • Branch productivity (amount) |
Risk Management Tools
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Cross-subsidy strategies to subsidize smaller loans | Cross-subsidy strategies to subsidize smaller loans | |
| • Through larger loans | • Through larger loans | |
| • Through additional services | • Through additional services |
Risk Monitoring Tools
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Monthly monitoring of efficiency and productivity indicators (operating expenses ratio and loan officer productivity) | Monthly monitoring of efficiency and productivity indicators (operating expenses ratio, cost per loan and borrower, and loan officer productivity) | Monthly monitoring of efficiency and productivity indicators (operating expenses ratio, cost per loan, borrower and member, staff allocation ratio, loan officer, staff and branch productivity) |
| • Trend analysis | • Trend analysis | • Trend analysis |
| • Compared to limits and projections | • Compared to limits and projections | • Compared to limits and projections |
Social Results
Policies
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Outreach: Definition of types of clients, aligned with the target expressed in the mission statement | Outreach: Definition of types of clients, aligned with the target expressed in the mission statement | Outreach: Definition of types of clients, aligned with the target expressed in the mission statement |
| • Gender | • Gender | • Gender |
| • Urban/Rural | • Urban/Rural | • Urban/Rural |
| • Level of Vulnerability/Poverty | • Level of Vulnerability/Poverty | • Level of Vulnerability/Poverty |
| Quality: Variety of products | Quality: Variety of products | Quality: Variety of products |
| Quality: Specific goals towards satisfaction | Quality: Specific goals towards satisfaction | Quality: Specific goals towards satisfaction |
| Financial Education: MFI has in place a specific program for financial education of its client | Financial Education: MFI has in place a specific program for financial education of its client | Financial Education: MFI has in place a specific program for financial education of its client |
Limits
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Outreach per type of client | Outreach per type of client | Outreach per type of client |
| Number of clients receiving financial education | Number of clients receiving financial education | Number of clients receiving financial education |
Risk Management Tools
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Satisfaction of the clients (drop out ratio) | Satisfaction of the clients (drop out ratio) | Satisfaction of the clients (drop out ratio) |
Risk Monitoring Tools
Tier 3 Guidelines |
Tier 2 Guidelines |
Tier 1 Guidelines |
| Monthly monitoring of social results indicators (outreach, quality and financial education) | Monthly monitoring of social results indicators (outreach, quality and financial education) | Monthly monitoring of social results indicators (outreach, quality and financial education) |
Evaluate
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