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RISK IN MICROFINANCE

Written By :
Prilo Krisnu Pradana (041611433098)
Nanda Lismatiara Zubaid (041611433085)
Ulis Fajar Choirotun Hisan (041611433120)
RISK IN MICROFINANCE

There’s remain several weaknesses in microfinance that need to be improved to


ensure its continuous development and successful implementation. A critical
aspect of microfinance that needs to be focused on is the risks management
aspect.
Microfinance is entrapped by various typ
es of risks, such as :
Default Risk
01 (Goetz and Gupta, 1995)

Disaster Risks
02 (Anand Kumar and Newport, 2005)

Currency Risk
03 (Lewis, 2005)

Interest Rate Risk


04 (Hughes and Awimbo, 2000)

Commercialization Risk
05 (MicroBanking Bulletin, 2003)
)
The Differences between Conventinal and Syariah Risk in Microfinance

In Chapter II article 4 point 1 PBI No. 5/8/PBI/2003 stated that the risks found in banks include:

Credit risk
The requirements for credit applications in Islamic microfinance are more
stringent than conventional banks so that the credit risk of Islamic microfinance is
smaller than conventional banking. Therefore on the credit side, in sharia rules,
microfinance act as sellers, while customers as murabahah buyers. Thus the debtor who
is considered not legally disabled and whose business activities are running well will
receive priority. Therefore, the risk of Islamic microfinane is actually smaller than
conventional. Islamic microfinance will not experience a negative spread, because the
funds disbursed for financing will be obtained income, not interest as in ordinary banks
.
Con’t
Interest rate risk
In islamic microfinance there is no interest rate risk
because according to shariah law interest rate, is riba that prohibitted.
Interest rate risk give a fixed return no matter how the condition of
the customer, MFI, and the market. In sharia the return depend on
the condition of the venture, is it give a profit or loss.
Compliant risk
Include all activities of operational in islamic microfinance
that should accord to shariah principle, such as the activities of
financing business or venture. The business that got the financing
from islamic microfinance should be in halal and productive industry
not the haram one like alcohol, bacon, prostitution etc. The islamic
microfinance also should have less than 10% of non halal revenue
and not using interest rate on the operational.
REVIEW JOURNAL
HANDLING DEFAULT RISKS
IN MICROFINANCE :
THE CASE OF BANGLADESH
Issue Discussed
This paper focuses on the issue of managing default risk
in the specific context of microfinance. Default risk is chosen
instead of another type of risks because default risk has severe
negative repercussions on the success of microfinance. A series
of defaults could lead to liquidity problem in the MFIs and
would consequently limit the ability of the MFIs to extend a
loan to other recipients. As would be revealed later, due to the
serious consequences of defaulted loans, the MFIs might
resort to various ways to reduce the possibility of default
among the borrowers.

Author’s Purpose
• This paper aims to identify incidences of default risks
in microfinance.
• This study identifies the incidences of defaults in
microfinance, which are post-disbursement
monitoring, technical assistance, inexperienced field
workers, weekly payment, accessible database,
family member illness, hiding business, lack of
motivation and over-stretched financial commitments.
Approach, Source of Data
• This study used semi-structured interviews to investigate the
incidences of default risks in microfinance. The sampling frame for
this study was drawn from the five branches of Grameen Bank.
These branches were contacted through telephone calls, and meeting
with the Bank managers were arranged to secure permission for
conducting interviews. Researchers ensured that the data collection
would be used for academic research purposes only, and respondents
participation was anonymous. 40 sample size was found for the
analysis. The interviews were conducted based on their experiences
on microcredit, more than one year in receiving the Grameen
Banking services. The interviews were conducted in June 2016 and
March 2017.
Mothode, Research Design
Research Gap
• The financial institutions and investment companies need to
identify borrower capacity and any obligation that may impede with
repayment. It may help them to maximize returns on profit and
minimize the risk of losses which contribute to economic growth.
This research have focus on borrower perspectif and have a specific
case for Grameen Bank in Bangladesh. this paper quotes several real
cases of default incidences, and based on these incidences, it
provides recommendations to handle the default risks. This study
aims to identify the incidences of default risks in microfinance and
provides a comprehensive study on the different ways to switch the
default risks in microfinance.
Does The Data Adequately Support The Conclusion ?

• Yes, It does.

• As microfinance has become a major anti-poverty tool in many developing


countries, microfinance could be used to complement government’s objective to
eradicate poverty. The smart partnership between the MFIs and the government
would help to expedite the successful implementation of microfinance in
poverty alleviation on a national scale basis. There is also the need to have a
common database of microfinance recipients so as to avoid the possibility of
borrowers defaulting due to over-stretched financial commitments resulting
from multiple borrowings from MFIs. All the suggestions highlighted above can be
implemented directly if the MFIs implement the concept of Islamic microfinance.
Equity financing, namely, mudarabah and musharakah (or a combination of both),
can be adopted so that there will be active participation by both parties from the very
beginning until the end to ensure a successful business venture.
Contributions
• This study would be helpful for the investment companies,
financial institutions, creditors and borrowers of microfinance.
The financial institutions and investment companies need to
identify borrower capacity and any obligation that may impede
with repayment. It may help them to maximize returns on profit
and minimize the risk of losses which contribute to economic
growth.
Assumption
• Due to the serious consequences of defaulted loans, the MFIs might
resort to various ways to reduce the possibility of default among the
borrowers.
• Field investigations revealed that the high degree of loan recovery in
microfinance is partly contributed by some element of “ forced-
recovery” imposed on the borrowers, either directly or indirectly.
• MFIs are successful in recovering the loan that they have extended, but
the true objective of microfinance of alleviating poverty and improving
the living standard of the poor is clearly being ignored.
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