Net interest income sensitivity
What is it?
Net interest income (NII) sensitivity measures to what extent (either in percentage or in absolute amount) the MFI’s level of NII is changeable due to a change in interest rate. This sensitivity will have a direct impact on the MFI’s net interest margin (NIM, defined as the difference between the interest income generated by an MFI and the amount of interest paid out to its depositors and funders). When exposed to basis risk, when interest rates change, the difference in underlying interest rate in which the instrument is price can change the underlying cash flows and earnings spread on the MFI’s assets and liabilities. NII or NIM sensitivity measures the rate sensitivity of an MFI’s assets/liabilities to changes in market rates. This sensitivity is calculated taking the repricing gap analysis of an institution and calculating the average time remaining of each time bucket within a 12-month period and transposing an interest-rate movement of a given number of basis points against that. Incorporating basis risk into this calculation affects the degree to which MFI rates will change in relation to a change in market rates. This will affect the degree of sensitivity.
Why is it important?
The MFI’s level of net interest income (NII) sensitivity will likely have a significant impact on the volatility of its total income to the extent that for a majority of MFIs, NII is their most important source of revenue. If the MFI tracks and analyzes its level of NII sensitivity, it is in an informed position to take steps to reduce it to the extent possible. The MFI’s financial policies should include a targets or range of acceptable NII volatility.
Key things to watch out for
- Does the MFI have the tools to accurately measure its level of net interest income sensitivity?
- Has it undertaken an analysis of the chief causes for the volatility (if relevant)?
- Is this topic on the agenda for the MFI’s Asset/Liability Management Committee or equivalent?
- If the volatility is high, is this risk captured in the enterprise-wide (company-wide) risk register/heat map/dashboard of key risks to the MFI?
How to calculate
Net interest income is the difference between the interest earned and interest paid by an MFI. Sensitivity in this context is used to mean readily affected by the change in interest rate.
Benchmarking
Not applicable.
Resources
- Liquidity Management, A Toolkit for MFIs. Available at www.gtz.de.
- Asset-Liability Management for Deposit-Taking Microfinance Institutions. Available at www.cgap.org.
- Toolkit for Developing a Financial Risk Management Policy. Available at www.womensworldbanking.org.
Evaluation
T2.A5-2NDT.LMT