Banking the un-bankable: an empirical study of risk and risk management by micro-financial institutions in Ghana

Abstract

This research work explores the risks that microfinance institutions (MFIs) face in their operations and the risk management strategies they adopt to mitigate their risks. Microfinance institutions serve some of the world’s most financially challenged population who otherwise would not have access to banking services. Risk management within the context of microfinance banking has gained importance within the last decade due partly to the fact that most MFIs are adopting business/profitability principles in their operations. Also, due to the recent financial crisis, MFI cannot afford to be indifferent to risk management practices in the battle for survival, financial sustainability and self-sufficiency. The data for this study is from both secondary and primary sources; 48 MFIs in Ghana responded to a questionnaire made up of 25 questions. Analysis of the responses obtained was done using Chi-Square test of equal proportions, P-values and other descriptive statistics. The Analysis found that the microfinance institutions surveyed are aware of the types of risk inherent in their line of business and do in varying ways employ some form of risk management strategies to mitigate losses and enhance profitability. Since credit granting stands at the core of the operations of MFIs, the management of risk as a result of the credits extended is crucial for their survival and profitability.