Graduation Model Encyclopedia

The RIM Graduation Model Encyclopedia is an exhaustive resource for understanding each guideline referenced in the Graduation Model framework. The Encyclopedia is designed to assist in the carrying out of an Institution Assessment—while also serving as an invaluable, easy-to-use and understand reference guide for various aspects of risk management.

 

  • Microfinance Institution Tier Identification

    To determine which tier an MFI belongs to, and therefore what degree of risk management is appropriate, the Graduation Model uses MicroRate’s globally accepted classification system as a starting point. The system is based on a three-tier structure that applies three simple, objective indicators that together act as proxies for an MFI’s level of maturity.

  • Organizational Foundation

    The organizational foundation represents the basic organization structure that MFIs should have in place in order to effectively engage in formal risk management.

  • Strategic Risk

    Strategic Risk encompasses the risk of financial losses and negative social performance related to the strategic direction of the institution.

  • 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).

  • Financial Risk: Non Deposit-Taking MFIs

    Financial risk is the risk of financial losses and negative social performance related to the maturity, currency, re-pricing, and concentration structure of an MFI’s assets and liabilities. As MFIs face product differentiation among loan assets and more choices in funding sources, it becomes increasingly important to manage these risks effectively.  There are four subcategories of financial risk: liquidity risk, market risk (including interest rate risk and foreign exchange risk), investment portfolio risk, and capital adequacy risk.

  • Financial Risk: Deposit-Taking MFIs

    Financial risk is the risk of financial losses and negative social performance related to the maturity, currency, re-pricing, and concentration structure of an MFI’s assets and liabilities. As MFIs face product differentiation among loan assets and more choices in funding sources, it becomes increasingly important to manage these risks effectively. There are four subcategories of financial risk: liquidity risk, market risk (including interest rate risk and foreign exchange risk), investment portfolio risk, and capital adequacy risk.

  • Operational Risk

    Operational risk is the risk of financial losses and negative social performance related to failed people, processes, and systems in an MFI’s daily operations. As MFIs decentralize and offer a wider range of financial products and alternative delivery channels, the operational risks multiply and it becomes increasingly important to manage them effectively. There are five categories of operational risk: people risk, process risk, systems risk, external events risk, and legal and compliance risk.

  • Financial and Social Goals

    The roof of the Risk Management Graduation Model represents the achievement of an MFI’s financial and social goals. It is essential to bear in mind that the responsibility for reaching these financial and social goal lies on the MFI’s board and senior management and is not part of the risk management function. Accordingly, an MFI’s performance should remain independent from its risk management function in terms of ownership of risk, responsibility, recommendations, and decision-making. Nevertheless, the risk management function should include financial and social performance indicators in its risk reporting to ensure that the board and senior management are conducting systematic monitoring, including monitoring for adherence to key financial and social goals within established risk limits.