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             POLICY FOR SACCOS


                    Faustin K. Zihiga


Association of Microfinance Institution of Rwanda (AMIR).

2nd SACCO LEADERS’ FORUM- Kigali Rwanda 21-23/03/2011
           Presentation Out line

   Overview introduction.
   What is Risk?
   What is risk management.
   Characteristics of SACCOs and the risk factor.
   Categories of Risks from a SACCO perspective.
   Risk management Policy.
   conclusion.
            Overview introduction
   Like food is a necessity to our body, Risk Management is
    the life and blood of any financial institution”.

   SACCOs are predominantly formed as a result of a need to
    mitigate life threatening risks by mainly the poor; however,
    they too (SACCOs) pause a big risk if not well managed
    through sound policies.

   The killer risk in our business, be it SACCO or any other
    entity providing financial services or intermediation, is the
    inability to know what our risks are or the extent to which
    these risks will affect our businesses/ SACCOs. SACCOs
    are prune to risk because like any other financial
    institution, they handle money and more than often; they
    handle many small cash transactions. Therefore Risk
    management policies are crucial to provide the essential
    guidelines to mitigate risks that come with the nature of
   The dictionary definition of risk is :- “Possibility or chance of
    meeting danger, suffering loss, injury”¹

   Risk is anything that will make your well intended actions to
    deviate and bring about unintended, in most cases, negative
    results and or loss.

   Because there is a risk of death people go to see a doctor,
    wear caskets, put on safety belts etc and in SACCOs because
    there is a risk of loss, closure or legal proceedings against
    people, sound risk management policies need to be in place
   ¹Longman learners dictionary
                          What is Risk management:

    Risk management is a systematic approach /process of
     identifying, prioritizing risks and implementing strategies to
     mitigate the risks. It involves prevention of potential problems
     and the early detection of actual problems²

    Consequently a Risk Management policy is a framework
     established within the business entity through which the
     systemic approaches and processes of risk management are

²Adopted from CGAP course materials.
Characteristics of SACCOs and the
Risk factor.
   Large number of small loans thus small number of many payments that
    are very difficult to track.
   Decentralized and dispersed operations over a wide disconnected
    geographic area
   Large numbers of less literate clientele that depend on the ingenuity of
    the managers of the SACCOs –
   Managers with a social science rather than a business background.
   Limited use of integrated management information systems.
   There is often great pressure to cut costs in most cases at the expense
    of adequate supervisional and control mechanisms.
   Reluctance to write off bad loans especially those given to influential
    members in the SACCOs or for fear of a bad image.
    Categories of risks.
   Risks can be categorized into 4 to 6 major categories

   Operational risks

   Institutional risks

   Financial management risks

    external risks.
   IT risk (very prevalent today).
   Governance risk (hidden risk)
    Categories of risks – Operational Risk.

   Operational risks are risks likely to occur while executing our
    day today business; examples include, fraud, theft, cash loss,
    security, Inefficiencies, redundancies, funds concentration etc
   The risk management policy will be designed depending on
    the risk area of the business or a combination of more than
    one policy if the risk areas are highly related. E.g an
    operational policy and procedure manual could address the
    above risk depending on the size of the business and the of
    variety of products.
Categories of risks – Institutional Risk.

    Institutional risks are those that threaten the institutional identity in
     terms of its Mission – sometimes termed Mission drift.

    Such risks may occur due to a change in the client target group,
     dependency on a single source of financing or donor dependency
    Policy may determine how much share capital each member
     should contribute and what this would translate into in terms of the
     decision powers to be exercise.
    What donations and under what conditions will they be accepted
     and financially accounted for.
              Categories of risks
         – Financial Management Risk.
   Financial management risks would include those
    related to treasury and liquidity management, Asset
    liability risks etc

   Financial and Treasury management manuals as well
    as asset liability policies will provide clear guidelines
Categories of risks – External Risks.

   External risks, these are risks that may impact the SACCO
    from without.

   Microeconomic challenges, competition, politics, regulatory
    environment, social unrest etc

Policies to mitigate such risks will vary from environment to
  environment while others will dependent entirely on the
  prevailing conditions at the time.
Categories of risks - IT Risk.

   IT risk (very prevalent today) Heavy dependence or non
   Dependency - unauthorized access, Data inaccuracies,
    environmental disasters, inappropriate use, limited software
    providers’ support.
   Non dependent – Manual systems data tracking inaccuracies,
    time management and compliancy, adoptability to systems etc
   Policies - Disaster recovery program, Business continuity
    programs, appropriate technology policies etc
     Categories of risks - Governance Risk.

 Governance   risk (hidden risk)
 Poor governance in SACCOs,
 Training, proper and distinguished roles of the
  organ with clear sanctions for those that do
  not respect procedures
         Risk management mechanisms :

Risk management policies and procedures will clearly
  state how particular risks will be :-

-   Deterred before they can be committed
-   Prevented when there is likelihood to occur
-   Detected in the system
-   Mitigated when they occur
    Effective risk management policies

    will have:-
   Clearly stated missions vision, objective and values to
    provide overall direction to all employee and stakeholders.
   Provide for a sound and safe conducive environment
   Motivated and confident people who have ownership
   Clear and easy to understand processes and procedures
   Accountable and transparent process
   Performance monitoring systems that can help measure
    progress/ achievement.
   Reliable management information systems be it manual or
    electronic with documented workflows.
   Risk management is something that each SACCO
    will always live with. It is a work in progress
    moving target function because business
    conditions change over time
   It will always require the conscious effort of
    management to continually monitor and alert the
    institution about possible risks, the implication and
    the mitigation process to be engaged.
   Policies and procedures are good but they have
    one major flaw, “they are easily, forgotten, skipped,
    neglected or overridden. It is people and their
    commitment that are critical in the success or
    failure of any procedures, policies and or
Thank You !!!

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