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Microfinance Risk Management:Current Status in Uganda
Managing risks a critical challenge for MFI sustainability
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Mustapha B. Mugisas Keynote address
AMFIU Annual Conference and AGM
20th 21stJune 2013Hotel Africana.
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What do you think is theimpact to the economy
when a business collapses?
What happens when that
particular business is amicrofinance?
Im
agecredit,
AC
FE.com
Why care?
#1
#2
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Keynote Agenda
1. Perspective
2. Current statusa) Regulatory
b)Governance
3. Way forward A low-end business woman withmerchandise.
Credit: Internet photo.
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Perspective
Case 1: The rise and fallof SOMEDI Microfinance.
Started in 1996, inMasindi
Expanded regionally.
Was no more by 2012
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Perspective impact
Joseph Businge,who used to
own threeshops, lost it all.He now lives inpoverty in
Masindi
Case 1: The rise and fallof SOMEDI Microfinance.
Lost donor goodwill Lots of people lost
livelihood
Bad reputation of theindustry
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Perspective why collapse?
Case 1: The rise and fallof SOMEDI Microfinance.
Poor governance High levels offraud
Lack ofshared
strategic focus
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Perspective
Case 2: The rise and fall ofVictoria Basin Savings &Microfinance Cooperative
Trust Ltd (VBS).
Started in 1990, in Rakaias building society
Transformed into aSACCO.
Off the radar by 2013!
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Perspectiveimpact.
9,854activeborrowersin 2005
56%women.
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Perspective why collapse?
Case 2: VBS Microfinance
High levels offraud
Failure to managechange
Poor governance
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Perspective lessons
Timelysupervision
Effective riskmanagement
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Status of Microfinance RM
1. Perspective
2. Current status
a) Regulatory framework
b)Governance
3. Way forward
Credit: Internet photo.
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(a) Regulatoryframework is key
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Majority of the players
are outside the formalregulation.
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Who is regulating who?
T a b l e 1 : C u r r en t s t a t u s o f th e M ic r o f in an ce i n du s t r y in U g an da
T i e r C a t e g o r y o f
I ns t i t u t i o ns
R e g u l a tio n N u m b e r
T i e r 1 B a n k s B a n k o f U g a nda ; F i n a n c ia l I n s t it u t io n s A c t
2 0 0 4
2 4
T i e r 2 C red i t I n s t i tu t i ons 4
T i e r 3 M ic r o f in a n ce D e po s i t -Tak ing I n s t it u t ion s
B a n k o f U g a n d a ; M D I A c t 2 0 0 3 4
T ie r 4 M F I s a n d S A C C O s T h e C o m p a n i e s A c t , 1 9 6 1 4 9
T h e N G O ( A m e n d m e n t) A c t 2 0 0 6 8 1
Fo r S A C C O s , th e R e g i s tr a r o f C oo pe r a t iv e
S o c i e t ie s ( M T I C ) u nd e r th e C oop e r a t iv eS o c i e t ie s A c t C a p 112
2 , 0 6 5
In f o rm a l : no c l e a r r egu l a t ion f o r o t he r
s a v i n g s a nd c r e d it s c h e m e s l ik e s a v in g s
a nd c r e d i t s c h e m e s in s e ve r a l c om pa n ie s .
U n k n o w n
O t h e r M o n e y le n d e r s M o n e y l e n d e rs A c t , C a p 2 7 3 , 1 9 5 2 5 3
S ou r c e : AM F I U pub lic a t io n s .
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Regulatoryframework
Should address thekey failings:
Avoid mission drift
Address fraud risk
Monitor keybusiness indicators
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Regulatoryframework
MoPED provides policyand oversight of thefinancial sector through
Rural Finance ServicesProgram (RFSP)
Department ofCooperatives in MTIC
registers & supervisesSACCOs
AMFIU andUCSC providesupport to
members asself regulating.
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Regulatoryframework
Tier 4 regulatoryframework underway
SACCOs to be classified
Large ones to be underprudential regulations,e.g. under amended
MDI Act
Cleardefinition of
large or
smallSACCOs to bespecified.
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Regulatoryframework
Microfinance is abusiness for socialimpact and economic
return. It supports thepeople at the bottom ofthe pyramid to change
their lives in asustainable way.
Risk is theprobabilitythat an
investmentsactual returnwill bedifferent
thanexpected
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Regulatoryframework
Microfinance is not about makinga lot of profits or becoming a
bank. It is about expanding scaleand capacity to extend very lowcost microloans to as many poorpeople as possible and enabling
their enterprises to grow,Mustapha B. Mugisa, 2013.
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The needfor regulation
Case 3: Enter Promotion ofEconomic Transformation &Realization of sustainable
Livelihood (PEARL)microfinance
Started in July 2006
Expanded rapidly Voluntarily closed in
2013.
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The needfor regulation
Lots of changes in theindustry
Both SACCO and non-
SACCO institutions
New dynamics e.g. moneytransfer, microcredits via
mobile money and mobilesavings = more complex!
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(b) It is all aboutGood Governance.
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Fact: risk management
is not structured inmany microfinances.
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Status on ground
Best practices are just onpaper
There is the Board,
Auditors, etc but theseare for cosmeticpurposes
Institutions want to justbe seen to be ok becausethey have the Board.
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Status on ground
Risk management isnot structured.Majority of staff dont
know their roles inrisk management!
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Status on ground
Generic risks exits e.g.credit, liquidity,technology,
governance. Few people, if any, know
how those risks are
identified, assessed,managed andcontinuously reviewed
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Status on ground
Although cases ofSOMEDI, VBS and PEARLhave shown fraud, IT &
staffare big challenges,few institutions haverecognized this. Why?
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Forensic. Advisory. Fraud
An averageorganization losesabout 5% of itsannual revenue tofraud,ACFE Reportto The Nations 2012.
Total annual revenue (allUganda banks) in 2011
1.94/-Trillion
Ugx. 4billion annually!
ACFE Uganda survey in2011 revealed banks &telecoms lose 15-25% ofannual revenue to fraud!
Average cost of fraud toeach bank in Uganda
#1: Lots offraudin the sector
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#2: Cyberthreat & ICTsecurity risks
YourInstitution
Virus & HackerAttack
Data Leakage &Network Abuse
Cyber Crime
Combat
QualityDemand from
Clients
35%
65%
For institutions65% of securitybreaches are internal
35% of security breachesare external.
You need tools to ensure realtime network monitoring?
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#3: Thepeople risks
Information theft
About 2/3 leavingemployees steal data
Microfinance IT systemfrauds; e.g. salamitechniques; loan write-
offs, etc.
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The wayforward
1. Perspective
2. Current status
a) Regulatoryb) Governance
3. Way forward
A low-end business woman withmerchandise.
Credit: Internet photo.
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XY Microfinance RM model
Case 4:XY Microfinance riskmanagement model is good.
Risk management is part of
their business
Process owners identify therisks and monitor them
Eight questions are askedand answered
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XY RM model awareness
#1: Do the Board, management and staff allunderstand how the risk register is developed?
F ig u r e 1 : R is k m a n a g e m e n t p r o c e s s a t X Y
1 . I d e n t i f y W h a t c o u ld g o w r o n g ?
2 . A s s e s s Ho w l i k e l y is i t t o h ap pen ? W h o w o u ld c o m m it fr a u d ? W h a t w o u l d b e th e i m p a c t
i f i t h ap pen ed
3 . C o n t r o l / M i t i g a t e W h a t s h o u ld b e d o n e t o
redu ce t h e r i s k ?
W h o o w n s t h e ris k ? W h a t m o r e t o d o a b o u t it ?
4 .
M o n i to r a n dC o n t i n u o u s R e v i e w
A re th e c o n tro ls e ffe c t iv e ? H a s t h e r i s k c h a ng ed ?
X Y O b je c t iv e s /
K R A s
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XY RM model tone at the top
#2: Is the Board involved inrisk management?
XY ensures a right tone at thetop throughout the RM process.
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XY RMimpact/likelihood
#3, for each identified event, arelikelihoodand impactclearly definedand assessed by process owners?
XY uses the likelihood and impactguide by the Institute of RiskManagement (IRM), specificallyfollows the ISO 31000:2009
guidelines as in tables 2 & 3 below.
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XY RM modellikelihood
a t in g S c o r e T h r e a t O p p o r t u n i ty
r equ en t 5 > 7 5 % c h a n c e o f o cc u rr e n c e Very r egu la r o c cu r r ence
Fa vou r a b le a n d f requ en t o c c u r r en c el ikely.
ike ly 4 > 5 0 % < 7 5 % c h a n c e o f o c c u rr e n ce C i rc u m s t a n c e s f r equ en t l y
en c ou n t e r ed
Favou rab l e ou t com e i s li ke ly t o beach i eved i n one ye a r.
M o r e t h a n 5 0 % c h a n c e o f o c cu r re n c e .os s i b l e 3 > 2 5 % < 5 0 % c h a n c e o f o c c u rr e n ce
L ik e l y t o h a ppen a t s om e po i n t int h e n ex t 2 y e a r s .
C i r cum s tances oc ca s i ona l lyen c ou n t e r ed .
Reasonab le p rospec t s o f f a vou rab l eresu l t s in on e ye ar.
2 5 % t o 5 0 % c h a n c e o f o c c u rr e n c e
n l ike ly 2 > 5 % < 2 5 % c ha n ce o f o c c u r r en c e
O n ly l ik e l y t o h a ppen on c e i n 3yea r s .
C i rc u m s t a n c e s r a re l y en c ou n t e r ed .
Som e c h a n c e s o f f a vou ra b l e ou t c om ein t h e m ed i u m t e r m
5 % t o 2 5 % c h a n c e o f o cc u r re n c e
e m o t e 1 L e s s th a n 5 % c h a n c e o f o c c u r r en c e .
H a s n e v e r h a p p e n e d b e f o re C i rc u m s t a n c e s n eve r en c ou n t e r ed .
L e s s t h a n 5% c h a n c e o f o c c u r ren c e .
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XY RM modelimpact
a t i n g D e f in i t io n M o n e t a r y
I m p a c t ( U g x m )
C o n s e q u e n c e I m p a c t o n
X Y so b j e c t i v e s
R e p u t a t io n p e r
e v e n t
N o n c o m p l ia n c e
5 V e r y h i g h
( c a t a s t r o p h i c )
> 5 0 L e a d s t o
t e r m i n a t io n o f
p r o j e c t s o r
w i t h d ra w a l o f
f in a n c i n g a n d i s
u n d a m e n t a l t o
s e r v i c e d e l i v e r y
N o n
a c h i e v e m e n t
o f o b j e c t i v e s ;
p e r fo r m a n c e
fa i l u re
M a x i m u m h ig h
h e a d l i n e
e x p o s u r e ; B o a r d
c e n s u r e ; l o s s o f
c r ed ib i l i t y
S e r i o u s w i l f u l
b r e a c h ; c r im i n a l
n e g l i g e n c e o r a c t ;
p r o s e c u t i o n ; B o a r d
c e n s u r e .
4 H i g h ( C r it ic a l) > 1 0 < 5 0 E v e n t w h ic h m a yh a v e a p r o lo n g e d
n e g a t iv e i m p a c t
a n d e x t e n s i v e
c o n s e q u e n c e s
S i gn i f i c a n td e l a y s ;
p e r fo r m a n c e
s i gn i f i c a n t l y
u n d e r t a r g e t
H e a d l i n e p r o f i l e ;r e p e a t e d
e x p o s u r e ; B o a r d
i nv o l v e m e n t ;
r e g u l a t o r y
e n q u i r y
D e l ib e r a t e b r e a c h o rg r o s s n e g l ig e n c e ;
f o r m a l i n v e s t ig a t i o n ;
d i s c i p l i n a r y a c t i o n ;
B o a r d i n v o lv e m e n t
3 M o d e r a te > 5 < 1 0 E v e n t w h i c h c a n
b e m a n a g e d , b u t
r e q u i r e s a d d i ti o n a l
r e s o u r c e s a n d
m a n a g e m e n te f f o r t
M a t e r i a l
d e l a y s ,
m a r g in a l
u n d e r
a c h i e v e m e n to f t a r g e t
p e r fo r m a n c e
R e p e a t e d n o n
h e a d l i n e
e x p o s u r e ; s lo w
r e s o l u t i o n ;
P a r l ia m e n t a r ye n qu i r y / b r i e f i n g
N e g l ig e n t b r e a c h ;
l a c k o f g o o d f a i t h
e v i d e n t; p e r fo r m a n c e
r e v i e w i n i t i a t e d
2 M in o r > 0 . 5 < 5 E v e n t c a n b e
m a n a g e d u n d e r
n o r m a l o p e r a t in g
c o n d i t i o n s
I n c o n v e n i e n t
d e l a y s
N o n - h e a d l i n e
e x p o s u r e , c le a r
f a u l t s e t t l e d
qu i c k l y ;
n e g l i g ib l e im p a c t
B r e a c h ; o b j e c t i o n /
c o m p l a in t l o d g e d ;
m i n o r h a r m w it h
i n v e s t i g a t i o n
1 I n s i g n i fi c a n t < 0 . 5 C o n s e q u e n c e s c a n
e a s i l y b e
a b s o r b e d u n d e rn o r m a l o p e r a t in g
c o n d i t i o n s
L i tt le i m p a c t N o n - h e a d l in e
e x p o s u r e , n o t a t
f a u l t, n o i m p a c t
I n n o c e n t p r o c e d u r a l
b r e a c h ; e v i d e n c e o f
g ood f a i t h ; l i t t l eim p a c t
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Impact xlikelihood = risk
X Y R is k in d e x = im p a c t x lik e lih o o d
IM
PACT
5
4
3
2
1
5 1 0 1 5 2 0 2 5
4 8 1 2 1 6 2 0
3 6 9 1 2 1 5
2 4 6 8 1 0
1 2 3 4 5
1 2 3 4 5
L I K E L I H O O D
S c o r e R is k m a g n i tu d e
2 0 - 2 5 M a x im u m
1 5 - 1 9 H i g h r is k
1 0 - 1 4 M e d iu m r is k
5 9 L o w r is k
1 - 4 M in i m u m r is k
#4, Are risksidentified and
managed?
Figure 2 XYs isk ni e se
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Figure 2: XYs risk universe
RiskUniverse
Strategic
Financial
Compliance
Procurement
frauds
Fraud
Over
indebtednessLiquidity
Asset
misappropriation
Non Compliance
to statutory
requirements
Dynamic legal
regime / Non
compliance to
Best practices
Non
compliance
to internal
policies
Unclear
Strategic
focus
Mission drift
Corporate
governance
Inadequate
Succession
planning
Ineffective
change
management
Poor
Client
management
Stakeholder risks;
concealment of
Malpractices
High staff
turnover
Gaps in
compliance
enforcement
Operational
XYs risk universewww.summitcl.com. 2013 All rights reserved.
Reputation Risk
Unclear
Performance
Indicators
Governance
constraints low
Anti-fraud
funding
Fraud.
Compromise
of XY
Credit /
fieldStaff
Weak contract
Management
Information
Technology
Poor change
management
Poor IT security
practices
Weak
IT system
securityHigh
Systemdowntime
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XY RMrisk reporting
#5, are risk reporting processes effective?R o l e Q u a r t e r ly S e m i A n n u a l / A n n u a l
u l t i m a t e a c c o u n t a b i l i t y a n d o v e r s i g h tf o r b u s i n e s s r i s k a n d c o n t r o l s .
r e c e i v e a s s u r a n c e t h a t r i s k m a n a g e m e n t i s w i t h i n p o l i c y.
R e c e i v e p e r i o d i c r e p o r ts f r o m A u d i tC o m m i t t e e a n d r e v i e w a l l r i s k s i n r e dc a t e g o r y .
A p p r o v e t h e R i sk M a n a g e m e n tS t r a t e g y .
top 1 0 r is k li s t. s u m m a r y d a s h b o a r d . p e n d in g li ti g a ti o n . m a j o r i n t e rn a l a n d e x t e r n a l e v e n t s . a u d i t a s s u r a n c e .
O v e r s e e s d e v e l o p m e n t ,i m p l e m e n t a t i o n a n d m a i n t e n a n c e o f
r i s k m a n a g e m e n t a c r o s s th e A u t h o r i t y .
r i s k p r o f i l e . s e l f a s s e s s m e n t . l o s s e v e n t d a t a . s t r e s s t e s t i n g . k e y r i s k i n d i c a t o r s . p e n d in g li ti g a ti o n .
T o p 1 0 s t r a te g i c r i s k s . T o p r i s k s o f th e d e p a r t m e n t s . a u d i t a s s u r a n c e . e f f e c t i v e n e s s o f r i s k m a n a g e m e n t . c o s t / v a lu e o f r i s k m a n a g e m e n t . b e n c h m a rk in g r is k m a n a g e m e n t.
o w n r is k s . d e s i g n a n d o w n c o n t r o l s .. r u n t h e b u s i n e s s
r i s k p r o f i l e . s e l f a s s e s s m e n t . l o s s e v e n t d a t a . s t ress t es t ing . k e y r i s k i n d i c a t o r s . p e n d in g li ti g a ti o n .
B o a r d
A u d i t / R i s k
C o m m i t t e e
D e p a r t m e n t /
S e c t i o n h e a d s
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XY RMrisk appetite & KRIs
#6, has the board set and communicatedrisk appetite?
R i s k c la s s B o a r d / S M T / m a n a g e m e n t le v e l a r t ic u la t io n o f r is k
a p p e t i t e .
S t r a t e g i c 1 ) Z e r o t o l e ra n ce o f a c t iv it ie s n o t w it h in t h e C om p a ny sb u s in e s s p l a n a n d s t r a te g i c o b j e c t iv e s .
2 ) V e r y L o w r is k a p p e t it e f o r r e p u t a t io n a l ris k s3 ) Ze ro t o l e r an ce f o r d i s c l o su re o f c on f i d en t i a l o r c l a s s i f i e d
in f o rm a t io n .
C o m p lia n c e 1 ) Z e r o t o le r a n c e f o r n o n - c o m p l ia n c eF i n a n c i a l 1 ) Ze ro t o l e r an ce f o r f r aud u l en t / th e f t a c t i v it y b y an y s t a f f,
c u s t o m e r o r s ta k e h o l d e r
O p e r a t i o n a l 2 ) L o w r i s k a p p e t i t e f o r i n a d e q u a t e l y t r a i n e d ,in e x p e r i e n c e d a n d u n s k i lle d s t a ff.
3 ) L o w o p e r a t i o n a l r i s k a p p e t i t e f o r a n y i n t e r n a l p r o c e s sf a i l u re s .
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XY RMtop 10 risks
#7, are top 10 risks identified andclearly monitored?
XY has operates a risk managementsoftware which provides a dashboardor a Risk Register for easy risk
monitoring on-going.
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XY RMrisk reporting
#8, Is the Risk Register up to date?
XY has operates a risk managementsoftware which provides a dashboardor a Risk Register for easy riskmonitoring on-going.
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Address ICT security
Train all computer users incomprehensive ICT security
96% of your staff are notIT secure aware
They are a weakest link
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Focus on fraud management
SCL fraud prevention toolkit
i. Fraud risk managementstrategy e.g. PAPEMO toolkit &
on-going awareness training toall staff
ii. Effective whistleblowing solution
Microfinance fraud prevention
Toolkit
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Call to Donors & Government
Donors must become businesspartners; provide support beyondenabling outreach and focus on on-site
capacity building Government must fast track the law
for regulating Microfinance Institutions GoU should take advantage of existing
institutions like AMFIU and UCSU
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Our values for your success!
We take pride indoing the rightthing, rather thanwhat is right for theprofitability of SCL.
For more info, visit:www.summitcl.comwww.mustaphamugisa.com
m: 0712 984 585.
Thank you!
http://www.summitcl.com/http://www.mustaphamugisa.com/http://www.mustaphamugisa.com/http://www.summitcl.com/