Asset and liability management for deposit-taking microfinance institutions
Brom, Karla;
Even the most mature microfinance institutions (MFIs) need to pay attention to their balance sheet to manage financial risks. All financial institutions take risks to make money. Risk management helps determine the appropriate balance between risk and reward. As MFIs diversify their funding sources, sound asset and liability management (ALM) is critical to help MFIs assess and manage financial risk. The current global financial crisis highlights the importance of good ALM. As funds become increasingly scarce and expensive, liquidity management becomes ever more important. The crisis has also underlined issues around leverage: while increased borrowing can help an institution increase its returns, it also exposes the institution to greater risk (as the many overleveraged institutions caught up in the current crisis know all too well). But none of these issues is a simple switch that can be flipped on or off- they involve balancing priorities and, for most MFIs, managing a mosaic of funding sources and an increasingly complex set of balance sheets. This focus note reviews some of the publications and tools currently available for MFIs, funders, and others who are interested in enhancing MFIs' practical knowledge of ALM and how to integrate it into an organization's overall risk-management framework.
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