How can you strengthen systems to manage social risk?
Managing risk is not just the responsibility of one person or team – everyone within your MFI must work together to develop effective risk management procedures, at all levels, and for all types of risk – financial as well as social.
Within this, the board and your internal control and information departments all have a key role to play:
The role of governance
The role of governance is crucial. The board has to be functioning effectively to ensure that all systems, including risk management policies and practices, are fully aligned with your MFI’s mission and values. The extent to which the board can effectively carry out its role depends on the balance of experience and the range of perspectives it brings together. Some MFIs have appointed a social performance committee to help the board understand and monitor the extent to which it is achieving its social goals – and if not, why not. A social performance committee can help your MFI to ensure that all its operations are seen through a social performance lens – an essential feature in implementing a comprehensive risk management framework.
Mission drift and other risks are more acute in situations when an MFI is transforming from a non-profit organisation into a regulated, for-profit body. Remember that who you invite to invest, and to join your board, will affect your future direction. Try to rise to the challenge of growing, and managing the risk of mission drift, with a social lens.
The role of internal auditors
Internal auditors have a key role to play, as they verify how well social performance risks are being managed and mitigated, and whether any necessary adjustments are being made. Data quality checks are also an essential part of the work that your internal control team should be doing.
It’s vital that you equip your internal audit team with the skills they need to assess how well you’re managing risks around social performance (mission drift, reputation risk, etc). Internal auditors usually have strong financial and accounting backgrounds, but have less experience of social performance management. They may even regard assessing social performance as a ‘soft’ skill, better left to sociologists, and therefore outside their remit. Here’s some key tips:
- Use language that auditors can relate to.Talking about ‘responsible finance’ and ‘balanced performance management’ is much more likely to appeal to accounting or internal control managers, whose orientation is focused on ‘harder’ financial skills.
- You can also use practical examples that highlight the importance of mitigating institutional risks, particularly for long-term reputation and financial sustainability.
Strenghening information systems
1. Know your client: collect and use client profile information
MFIs collect valuable information from clients as part of the loan appraisal process, about the client’s family, asset base, sources of income and level of poverty. But this information is rarely collated, analysed and used to improve the MFI’s risk management strategies. If your MFI systematically collates and analyses data, with careful selection of indicators, you will be much more able to track outreach. You will also be able to easily identify the different market segments and the products that would serve each best. For example, Fonkoze (in Haiti) and Prizma (Bosnia and Herzegovina) have both designed products for clients experiencing different levels of poverty. You can also use client-level data as a baseline so that you can track changes in clients’ lives over time.
2. Track and analyse exit rates
High rates of growth in overall number of clients and portfolio can mask high levels of client exit. Client retention is a useful proxy indicator of client satisfaction, and generally means you have loyal clients and provide a useful service. Client retention also contributes to more cost-effective institutional growth. While you should expect some degree of client exit in any programme (often after the first loan cycle), increasing levels of exit can represent a significant risk. You should track and analyse client exit rates so that you can identify what is making your clients dissatisfied. It could be that your products are not as appropriate as they could be, or you could be losing out to your competitors. Asking clients why they left and analysing their reasons is a vital part of market research.
Ideally, you should define, measure and track dropouts. But to do so, your management information system (MIS) must have unique client identifiers so that it can distinguish between dropouts and clients who are simply resting between loans – as well as any who have moved on to banks or other institutions.
3. Collect and use client feedback
Your MFI needs to listen to clients’ views about how you are performing in order to improve your services and be responsive to clients’ needs. But to do this, you need to ensure that channels exist to receive feedback from clients. You can collect this information through formal or informal channels. Formal channels include visits by internal audit staff to a sample of clients, market research (including the ‘mystery shopping’ technique of researchers posing as clients, and providing feedback on the experience), client satisfaction surveys, and annual or bi-annual meetings where clients or their representatives can raise issues. Informal channels include routine staff visits and meetings.
In Haiti, the extreme vulnerability of clients’ livelihoods increases the risk for Fonkoze, an MFI that provides financial and educational services to poor people. Client feedback, combined with other research, prompted a number of changes to manage risks, such as the introduction of life insurance linked to the loans, paying off loans in the case of the client’s death, and providing a sum for funerals or other one-off needs.