THE IMPACT OF FINANCIAL RISKS ON ASSET AND LIABILITY

MANAGEMENT IN MICRO FINANCE INSTITUTIONS. (IN CASE OF

OROMIA CREDIT AND SAVING INSTITUTION IN AMBO BRANCH)

JIMMA
UNIVERSITY
COLLEGE OF
BUSINESS AND
ECONOMICS
DEPARTMENT
OF BANKING AND FINANCE

A RESEARCH PROPOSAL SUBMITTED IN PARTIAL FULFILMENT FOR

THE REQUIRMENT OF BA DEGREE IN BANKING AND FINANCE

PREPARED BY: DERARA GUDISA

ADVISOR: TADELEM (Assistance professor)

JANUARY 2019

JIMMA, ETHIOPIA

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Acknowledgement

Initially I would like to thanks Almighty God for all things that gives me everything and helps
particularly to prepare this proposal. Secondly I would like to thanks my friends for support in
much aspect to prepare this proposal.

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 ACRONOMYS

MFI:Micro finance institution

MFIs: Micro finance institutions

OCSI:Oromia Credit and saving institution

ALM:Asset and Liability Management

NO:Numbers

WEDP: Women entrepreneurship development program

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 Abstract

The underlined aim of financial risks on asset and liability management is maximize
microfinance institutions return by maintaining its impact on financial risk exposures within
acceptable limits. The study follow on the following factors related to the impact of financial
risks on asset and liability management in oromia credit and saving institutions (OCSIs). In
systematic investigation of the research, the researcher used judgmental sampling techniques.
The influential factor on asset and liability management; the most threatening financial risks:
and the techniques to manage financial risks in OCSMFI ambo branch

The study will be carried by collecting primary and secondary data. primary data, which will collected
through questionnaire and interview. It will be use to collect data from employees and customers of
oromia credit and saving micro finance institutions (OCSMFIs). The secondary data wich will be collect
from the OCSIs annual reports,available literatures,documents and websites. Simple descriptive analyses
used through tables, diagrams and computation of percentage.

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Table of contents
Content Page

Acknowledgment………………………………………………………………………………… I

Abbreviation.................................................................................................................................. II

Abstract…………………………………………………………………………………………..III

List of table…………………………………………………………………………………….…
IV

Table of contents …………………………………………………………………………………V

Chapter one
1. Introduction………………………………………………………………..…. ………………1
1.1 Background of the study……………………………………………………………….… 1
1.2 Background of the organization……………………………………………………………2
1.3 Statement of the problem………………………………………………………………… 3
1.4 Objective of the problem…………………………………………………………………. 4
1.4.1 General objective………………………………………………………….……… 4
1.4.2 Specific objective………………………………………………………….………4
1.5 Significance of the study………………………………………………………………… 4
1.6 Scope of the study…………………………………………………………………….…...5
1.7 Organization of the paper…………………………………………………………………..5
Chapter Two
2. Review related literature……………………………………………………………………...6
2.1 Definition of financial risks..................................................................................................6
2.2 Concepts of financial risks on ALM……………………………………………… ….... 7
2.3 The major types of financial risks………….………………………………………………8
2.4 Financial risk assessment framework…………..………………………………………….9
2.5 Financial risk management………………………………………………………………10

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 2.6 Components of financial risk management………………………………………………11
2.7 Guidelines for implementing a financial risks management …………………………… 13
2.8 Ten guidelines for financial risk management…………………………………………....14
2.9 Risk management feedback loop…………………………………………………….…..14
2.10 Financial risk management tools for Microfinance institution …..…………….………16

Chapter Three
3. Research Methodology…………………………………………………………….............17
3.1 Research design…………………………………………………………………………17
3.2 Study area…………………………………………………….…………………………. 17
3.3 Study period ………..…………………………………………………………………….17
3.4 Target population…………………… ………………………………………..………….17
3.5 Source and type of data …………………………………………………………………..17
3.6 Sample size and sampling techniques……………….........................................................17
3.7 Method of data collection………………………………………………………………..18
3.8 Method of data analysis………………………………………………………………….18
3.9 Description of study variables………………………………………………………...…18
Chapter Four...............................................................................................................................19
4. Time plan and cost budget…………………………………………………………………..19
4.1 Time plan…………………………………………………………………………………….19
4.2 Cost budget…………………………………………………………………………………..20

REFERENCE……………………………………………………………………………….21
APPENDIX A ……………………………………………………………………………….22
APPENDIX B……………………………………………………………………………….25

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 CHAPTER ONE
INTRODUCTION

1.1 BACK GROUND OF THE STUDY

Any financial risk is the probability that the decision will lead to different outcome as though due
to the fact that decisions are made under uncertainty with imperfect information (Cendrowski
and Mair, 2009/1).

MFI are usually known as higher risk businesses when compared to the commercial banks
(Wright and Haynes 2005). Managing financial risks in this higher risk environment would
therefore probably be different than managing risks in commercial bank.

MFI operate in niche market as they address the need of those clients who are considered “high-
risk” by bigger banks. High risk group or individual are characterized as those with very few
assets requiring very small loans, high degree of those follow-up business appraisal and
evaluation as well as those engaged in activates whose income is fluctuating such as small-holder
farmers or petty traders. Thus the MFIS cater for a market with an operationally acceptable
demand level and where clients can be protected from the unreasonable conditions of the
informal money lenders such MFIS however, charge high a administrative cost and higher
charges for financial risk (challenge which is addition to market interest rates, and taking
advantage of the niche market for micro loans (Sunita, 2003).

Due to the new regulated environment the impact on the micro finance industry was significant
as it resulted in an average fail in net profit of between 15% and 25%. The role players in the
micro finance industry become formalized and had to indicate product development and
emphases current product expansion in order to stay competitive and ensure return on the capital
of share holders. For these reasons, micro lenders Started managing their risk in a more formal
way (van Hear den, 2008, p.17).

Microfinance is used as an instrument for alleviating poverty and approving the poor’s access to
financial services especially in developing countries like Ethiopia (Hietalathi and Linder, 2006
(2011). However in order for MFIs to sell their products and services (loan pricing, credits,

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savings, payment services, insurances, consulting services and other related products) success
fully to the volatile lower and of the consumer chain they need be practically sure that they sell
the correct products to the correct clients. This will ensure higher collect ability, which is one of
the biggest determinants of success in the micro finance industry. As the micro finance sector
forms of part of Ethiopia financial industry, it is important to provide academic literature and fill
some knowledge daps regarding financial risk management in this industry. It is important to
understand that risk in microfinance terms and financial risk in banking terms are probably same
risks, with the different being the appetite for it.

1.2 BACKGROUND OF THE ORGANIZATION

Oromia Credit and Saving Institution is one of the largest MFI in Ethiopia that was established in
August 1997. It has been providing MF services mainly in Oromia National Regional State.
Besides Oromia regional state, it has branches in Harari National regional state and Addis Ababa
City Administration, which is the capital of the federal states in the country. OCSI also opened
branches in Dire Dawa City Administration particularly to provide loan for women
entrepreneurship in collaboration with Women Entrepreneurship Development Program
/WEDP/. Although OCSI is a successful self-sustained MFI, it has challenge in fulfilling the
credit demand of the poor people and entrepreneurs due to shortage of loan able funds. In
addition, company needs assistance in area of capacity development, training, exposure visit,
scholarship etc. to become center of excellence in the micro finance industry of Ethiopia. OCSI
is a micro finance institution that strives to strengthen the economic base of low income earning
people in both urban and rural parts. The company operates in Oromia national regional state
setting its head quarter in Addis Ababa and 18 zonal offices in the capital of 18 Oromia zonal
administrations. The numbers of full-fledged branches of the company reached 305 in 2015,
from those Ambo branch is the one. OCSI in Ambo branches have been delivering the credit
service to the poor way group guarantee mechanisms that does not require material collateral.
Delivering loan to the poor through peer pressure requires only good character. Saving and loan
with limited sub- products were the only products of OCSI at establishment. On demand based
research and product development effort, the company has presently 'four major products with
multiple sub-products. Among the products and sub- products, the following are widely
implemented in all branches; including loan, saving, insurance, local money transfer and

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advisory services.

1.3 STATEMENT OF THE PROBLEM

Provision of micro finance services that can have a sustainable impact on clients well-being and
reduced vulnerability is not all easy endeavor, MFIs many financial risks that can adversely
affect their long term growth operational and financial sustainability (jeyanth, 2003).

This may probably be due to the volatility of its clients base the unknown factors interims of
clients base the lack of corporate financial risk tools especially the micro finance role payers find
it difficult to manage the financial risks cost effectively in a pro-active manner. This may lead to
the departure of those roles. Players from the micro finance industry, the overall indebtness of
the base and non-sustainable business operations some of the most seniors financial risks
specifically form OCSI include credit risk, liquid risk, interest rate risk and portfolio risk.

This study will aim to answer the following basic questions, specifically in Oromia credit and
saving micro finance Ambo branch

.What are the most threatening financial risk?

.How can it raise specifically OCS micro finance institution in Ambo branch?
• What are the cost effective ways to manage financial risk?

• How does financial risk affect asset and liability management in cost of OCSI?

1.4 OBJECTIVE OF THE STUDY

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1.4.1 GENERAL OBJECTIVE

The general objective of this study will to assess the impact of financial risks on asset and
liability management in Oromia credit and saving microfinance institutions.

1.4.2 SPECIFIC OBJECTIVES

The specific objectives of the study will the following;

• Assess the most threatening categories and causes of financial risk in OCS microfinance
institution.

• To identify the screening techniques to measure finance risk.

• Assess to manage the financial risks in a cost efficient and economically effective way.

• To indentify the most influential factors affecting asset and liability management

1.4 SIGNIFICANCE OF THE STUDY

The study gives access to a theoretical frame work to assist in managing and minimizing financial
risk for Oromia credit and saving institution business in a cost effective way. The study would
determine the probability of predicting if a microfinance client will perform well or if the client
would default, it will also serve as basis for forth research on the micro finance industry and
related financial institutions. The result expected from the financial institutions such as
commercial banks and other formal financial institutions and as well as for the other researchers
from a practical perspective, the study is use full to owners directors and managers of MFIs to
manage the whole process of finical risk in a cost efficient and economically effective way

1.5 SCOPE OF THE STUDY

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This study will be conducted specifically Oromia credit and saving microfinance institutions in
ambo branch. Which is selected the study area among different provinces in Ethiopia as available
financial and material resource back ground the proposal intends to address issues regarding the
strength and weakness on practice of financial risk management in microfinance industry. The
study will however focus on the impact of finical risks on asset and liability management
specifically Oromia credit and saving institutions. Since it is difficult to obtain information
regarding financial risk management practices from other competing institutions like commercial
bank the scope of this study will be limited in OCSI in ambo branch.

1.6 ORGANIZATION OF THE PAPER

This research proposal consists of four chapters. The first chapter consists the introductory part
which includes background of the study, statement of the problem, objectiveof the study,
significance of the study and scope of the study.

The second chapter consist only the literature view.

The third chapter includes the term research design, study area, study period, target population,
source and type of data, sample size, sample technique, method of data collection, method of
data analysis, presentation and interpretation, and descriptive of study variables.

The fourth chapter composed data analysis and interpretation and finally the last chapter deals
with the summary, conclusion and recommendations.

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 CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 DEFINITION OF FINANCIAL RISKS

When starting up many businesses takes on some debt to finance growth financial risk refers to
the chance that business cash flows are insufficient to pay off debt and other financial
responsibilities. Exposures of financial risks related to the amount of debt the business incurs and
it’s independent of the business operations. Taking on more debt increases the chance that the
business will not be able to meet all of its financial obligations.

According to C.B Baker (2001), financial risk is defend to the added variability of the net cash
flows of the owners of equity that results from the fixed financial obligation associated with debt
financing and cash leasing. Also as mentioned by Van Arsdell (p.304) and Van Horne (P.252),
financial risk encompasses that the risk of cash in solvency. However this notion will be
expanded to include the risk of being unable to meet prior clam is with the cash generated by the
firm.

Debt financing always has the risk of the MFIS in ability to pay back the loan and even
liquidation of the MFI (Harper, 2005, p.277). Even though the cost of debt is lower than the cost
of equity due to tax advantages, it brings forth financial risks with it that increase the cost of
equity (Vigario, 2002, p.47).

Financial risk management has received increased attention over the past year (Glaum, 2000,
p.377) the reason for this is that financial risk through they are not a core competence of non-
financial risk. Firms also influence their business operations to large extent (Traintis, 2000,
p.559).

Microfinance entities face a spectrum of risks of which the biggest is probability of the risk of
clients not repaying their loans. MFIs who can success fully manage these risks, will be success
full (Herger, 2005, p.86). Successful MFIs have right internal supervision, good internal audit
practices and good financial procures and sound financial risk management (Hartung micro

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finance risk with effective internal controls. The amount of debt is determined by the company’s
targeted financial risk policy (Ross, waster field, 2001, p.45). A microfinance company cost of
equity rises of shares increase. A microfinance company’s financial risks increase the more debt
reliant the company’s is (finnerty, 1990, p.61). This means that the microfinance company needs
to find the balance between debt and equity finance in order to minimize risk and maximize
value. The gain from leverage is the tax deductively of the interest expense.

The negative side of debt is that the financial risk of the business increase (ward and price 2006,
p 76). The optimal level of debt feisty is where the marginal gain from debt meets the financial
risk associated with it. For that reason, it is agreed with the burner case or burner (1993), that the
optimal debt equity ratio create value, because the maximum benefits meet the minimum risk.
Financial risk on the other hand relates to risks that rise from the capital structure

2.2 concepts of financial risks on ALM

The author Kara bloom (2009), acknowledges that financial risk can yield high profits, but
argues micro finance institutions to maintain proper asset and liability management to find level
of risk that the institution can bear. As the financial activity of micro finance institutions grows
more complex and binding increasingly comes from commercial, sources, the carefully
examination of the balance sheet can help MFIs measure and evaluate risk. Risk in this case, is
defined as a mismatch between assets and liabilities. In this paper, the author examines three
types of financial risks: liquidity, credit and interest rate risk.

Claiming that the priority of an MFIs out to be the creation of straight forward products for its
clients base, unlike the average commercial bank, the author states that ALM should lean
towards reaching to discrepancy between.

Assets and liabilities rather than will full Crete them the author believes that the MFIS ought not
to rashly attempt profiting from financial risk. But if risk is taken it should be limited to create
credit risk rather than interest rate risk on foreign exchange rate.

The author admits that it is difficult for microfinance institutions to match assets and liabilities. If
the MFI can calculate the profitability impact of a mismatch them the institution at least has
awareness of the risk and allowing the risk to persist, and can set a limit for financial risk the

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institution is killing and able to undertake with in specific time frame. (http://www.cgap.org).

2.3 The major types of financial risks

The business of financial institution is to manage financial risks, which include credit risks,
liquidity risks, interest risks, foreign exchange risks and port polio risks (ledger wood, 1998,
p.550).

Credit risk: as with any financial institution, the biggest risk in finance is lending money and
not getting it back. Credit risk is a particular concern for MFIs because most micro lending is
unsecured (i.e. traditional collateral is not often used to secure micro loans. Therefore, credit risk
represents potential loss resulting from the poor quality of the organizations assets, particularly
the loan portfolio (Joanal, 1998; p.270).

Liquidity risk: liquidity risk is the financial risk that the MFI cannot meet its obligations on a
timely basis liquidity risk is a possibility of negative effects on the interest of owners, customer
and other stock holders of the MFI resulting from the in ability to meet current cash obligations
in timely and cost efficient manner (Richard, 1996, p.159).

Interest rate risk: interest rate risk is the risk of financial loss from changes in market interest
rate. Interest rate risk arises when interest on assets and liabilities (which fund the assets) are
mismatched both in rates and terms. Interest rate risk occurs after assets and liabilities have been
priced or loans have been looked (Bartel, Mc Cord and Bell, (1995).

Portfolio risk: refers the risk inherent in the composition of overall loan portfolio polices on
diversification, maximum loan size, types of loans structures lessen portfolio risk therefore it is
important assessment and its challenge to know the effectiveness (hedger wood 1997 p. 320).

2.4 financial risk assessment framework

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Most MFIS are small and unprofitable they operate without systems that adequately reduce
financial risk. Although a micro finance literature focuses on success stories such as bancosol in
Bolivia or BRIs micro finance units in Indonesia, those organizational are exceptional. For micro
finance programs striving to fulfill their dual mission of sustainability and outreach to their poor,
CARE suggests implementing the financial risk assessment framework that addresses two
agendas.

• Financial health

• Institutional development

A standard financial risk assessment of a microfinance institution typically addresses the first
issue only.

In assessing the financial health of banks or other financial institution, one would consider the
organizations asset and liability management including credit risks liquidity risks, interest rate as
well as operation risk such as fraud and inefficiency.

Microfinance risk assessment also needs to embrace an institution development perspective. As

MFI evolve from donor dependency to commercial independence clear vision, reliable systems,
effective governance and staff capacity become critical in the ability to manage risk.

This frame work provides managers and directors of micro finance institutions with a step by
step means of assessing their organizations current and potential vulnerability.
(ledgerwoodjoanal, 1997).

In order to complete a risk assessment one needs sound information to base one assessment on.
This information should take on strong future perspectives and not only consists of historical
information (Janson van Vuuren, 2007, p. 194).

2.5 FINANCIAL RISKS MANAGEMENT

2.5.1 ASSET AND LIABILITY

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The financial vulnerability of an MFI is summarized in asset and liability risks include interest
rate, asset and liability risks, which include interest rate, (liquidity and foreign exchange risks.
Interest rate risk rises when the terms and interest rates of assets and liabilities (which fund
assets) are mismatched. For example, if the rates on short term liabilities rise before and MFI can
adjust its lending rates, the spread between interest earnings and interest payments will narrow
seriously affecting the MFIs profit margin. MFIS operating in inflationary environments are
particularly vulnerable to this type of risk.

Liquidity risk involves the possibility of borrowing expensive short term funds to finance
immediate needs such as loan disbursement; bill payments or debt repayment MFIS are most
vulnerable to foreign exchange risk if they have converted to local currency and therefore are
earning revenue in the local currency.

The financial risk associated with financial management represents a first area of vulnerability
for micro finance institutions. Distinct from institutional operational risks, financial risks are
inherent in the range of strategies and procedures used by micro finance managers to optimize
financial performance (ledger wood joanal 1997, p.37).

2.5.2 Inefficiency

Efficiency remains one of the greatest challenges for MFIs. It reflects an organizational ability to
manage costs per unit of output, and thus is directly affected by both cost control and level of
outreach. Inefficient microfinance institutions heisted resources and ultimately provide clients
with poor services and products, as the cost these inefficiencies are ultimately passed on to the
clients through interest rates and higher clients transactions costs (ledger wood toanal, 1998).

2.5.3 System integrity

Another aspect of financial management risk is the integrity of the information system, including
the accounting portfolio management systems. An assessment of this risk involves checking the
quality of the information entering the system, verifying that the system is processing the
information correctly and ensuring that it produces useful reports in a timely manner (ledger
wood Joanal, 1998).

A micro finance institution is only vulnerable to these financial risks if it has one of the

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following characteristics;

• It borrows money from commercial sources to fund its portfolio.

• It funds it portfolio from client savings.

• It has liability denominated in a foreign currency.

• The risk of micro loans being written off due to the lack of repayments.

• Risks relation a debtor management systems in the MFI environment and

• Cash flow risk for MFIs.

2.6 components of financial risk management

Neither academic research north experience of end-users and solution providers has produced of
definitive description of the components comprising the financial risk management frame work.
See, for instance, lam (1999), the books by stulz (2001) and mark (2001) or the hand book by
lore and borodovsky (2000).

The components of effective financial management are the following:

• Risk measurement

• Risk management

• Performance measurement and

• Corporate governance

Risk measurement first identifies the risk factors that arise in the operation of the business and its
environment some risks are connected to the corrective ties of the firm (core exposures ) and
some of the facilitating activities ( peripheral exposures). For instance actuarial risks are a core
exposure for an insurer while credit risk is per pearl exposure in managing the insurers’ asset

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portfolio.

Risk measurement analysis how these separate financial risks intact at the institution level and
how they influence business performance. The end product of this analysis is a distribution of
profits and losses under different future realization of the financial risk factors.

• Risk management

The risk profile identified through risk measurement must be shaped in to an overall financial
risk profile for the micro finance institution. The overall profile does not just happen as the sum
of the risk profiles of individual lines of business. Instead it should be shaped to achieve the
firm’s objectives, while satisfying regulatory restrictions and business policy requirements. In
the most basic approach the risk profile can be shaped by controlling the risk of individual
position through limits management in order to support diversification, hedging and risk transfer
management system must provide the following functionality.

• Portfolio compression to represent complex portfolio simply.

• Risk decomposition to decompose risk by asset and/or risk factors and quantify the
contribution of each asset r risk factor to an overall portfolio.

• “What if” analysis to understand how new trades affect the portfolio risk.

• Hedging and optimization of complex portfolios.

To these core functionality we may add system to understand the impact of instruments non-
generalities and of non-normal risk factor distribution or portfolio risks and to understand
complex, non-intuitive, market views implicit in the portfolio as well as in the investment policy
or market liquidity (stulz, 1996).

• Performance measurement

Having estimated the financial risk profiles of different lines of business and shipped the risk
profile of the client, the financial risk management turns to the problem of performance
measurement. The task now is to estimate the contribution of each risk factor to the firm

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diversified overall risk profile. This is the feedback loop in the financial risk management
process. Performance measurement serves in the decentralized management the enterprise by
setting goals for line managers when risks are first acquired determine local hedges and capital
equity allocation and providing reward incentives. Performance derived from the steps of risk
measure wide and risk management out lined earlier ensures firm wide consistency in the
handling of risks (lam, 1999).

• Corporate governance

None of the component of risk management as out lined above will achieve its tasks without the
support of appropriate corporate governance corporate management ensures that the components
of the risk management are in place; they function properly and are assigned with each other and
with the objective of the microfinance risk management strategy. To do so management must
define the institutions risk appetite interims of loss tolerance risk to capital leverage and target
debt rating (mark, 2001).

2.7 Guide lines for implementing a financial risk management frame work

A financial risk management frame work is a guide line for MFI. Managers to design an
integrated and comprehensive financial risk management system that helps them focus on the
most important financial risks in an effective and efficient manner. Therefore, a financial risk
management frame work is a consciously designed system to protect the organization from
undesirable surprises (down side risks), and enable it to take advantage of opportunities (up-
siderisks).

2.8 Ten guidelines for financial risk management

• Lead the risk management process from the top.

• In corporate financial risk management in to process and system design.

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 • Keep it simple and easy to understand.

• Involve all levels of staff

• Align risk management goals with the goals of individuals.

• Address the most important financial risks first.

• Assign responsibilities and set monitoring to board.

• Design informative management reporting to board.

• Develop effective mechanisms to evaluate internal controls.

• Manage risk continuously using financial risk management feedback loop. (Ledger wood
joanal, 1997, p.120).

2.9 Risk management feedback loop

These steps are part of continual risk management feedback loop that consistently asks
whether the assumed risk is reasonable and appropriate or whether it should be
reassessed.

Ina nut shell the risk management feedback loop includes the identification of risks to be
controlled the development and implementation of strategies and policies to control risk and the
evaluation of their effectiveness. If result indicated that financial risks are not adequately
controlled, then policies and strategies are redesigned, re-implemented, re-tested, and
reevaluated.

Figure 1 illustrates the cyclical nature of the risk management process.

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Figure 1: risk management feedback loop

Identify, assess and prioritize

Revise policies and Develop strategies to

procedures measure risk

Test effectiveness and Design policies and

evaluate results procedures to mitigate risk

Implement and assign responsibility

2.10Financial risk management tools for microfinance institution

According to Cendrowsk and Mair, 2009 (11).Financial risk management tools consist of the
following.

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 • Risk identification

This is the process of gathering information in order to identify possible risks. The end result of
this process will be a list of potential risks of various problems (Janson Van Vuuren, 2009)

• Risk evaluation

In this phase, the consequences of each financial risk on the list should be determined especially
for the different stake holders, namely customers, suppliers, employees, director, shareholders
and so forth. Once this has been done, the current control measures in place to mitigate these
risks should be evaluated. Risk evaluation can be seen from the two perspectives of probability
and magnitude. Probability refers to the risk that something will go wrong and magnitude to the
extent to damage if something goes wrong (Janson Van Vuuren, 2009).

• Risk mitigation

After financial risk s with their consequences have been identified and controls have been
evaluated, a risk mitigation strategy should be implemented. This process will focus on financial
risks that seem intolerable to the micro finance institution. This process might involve revising
current controls the implementation of new controls of the removal of factors that cause these
financial risks. This section will therefore focus on decreasing the probability that an event
occurs and the magnitude there of if it occurs. If financial risk tolls manage to combine the
aspects of probability and magnitude financial risk will be minimized effectively. (Janson van
vuuren, 2007

CHAPTER THREE

METHODOLOGY

3.1 RESEARCH DESIGN

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To conduct this study the researcher will be used descriptive form of research design why because the
main objective of this study is to assess and describe the major problems on the impact of financial risk
on asset and liability management.

3.2 STUDY AREA

This study will be conducted in west shewa zone of Oromia regional state at ambo towns.

3.3 STUDY PERIOD

Study period is the time from the selection of title to the final document of the research papers

3.4 TARGET POPULATION

The target populations of the study will employees and clients of OCS MFI.

3.5 SOURCE AND TYPE OF DATA

The researcher will use primary source of data and secondary source of data in order to complete the
study effectively. The primary data sources of the study will be collected through open ended and close
ended questionnaires with the help of reasonable employees and customers of the OCSI and personal
interviews of OCSI MFI manager in ambo branch, while the secondary data which is already exist.

3.6 SAMPLE SIZE AND SAMPLING TECHNIQUES

In attempting systematic investigation of the research, the researcher used judgmental sampling
techniques.

From 30 employees of OCS MFI, the researcher will judgmentally selects 10 employees and from 350
clients of OCSI, Ambo branch the researcher will use judgmentally selects 20 clients. Sampling
techniques is that it has low cost interims of money and save time as well as its convenience to use
effectively and select target respondent that provide relevant information.

3.7 M ETHOD OF DATA COLLECTION

The study will conduct based on primary and secondary. The primary Method of data collection tools
includes questionnaires and interview; the data will be collected from different employees, and
customers that have long experience in Oromia credit and saving micro finance institutions. Secondary

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data will also collected from book, website, and any related research papers.

3.8 METHOD OF DATA ANALYSIS

After relevant data has been collected from different sources using different data collection methods, the
researcher analyzed the data. After being data collected it was processed using descriptive analysis
through, tables, and computation of percentage. This descriptive analysis of the research design enable the
researcher to capture both qualitative and qualitative data to result indicated.

In this study descriptive analysis would choose becomes of its, simplicity and clarity to draw inferences.
Averages, percentages, diagrams and tables would be analyzed.

CHAPTER FOUR

TIME SCHEDULE AND BUDGET

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 4.1 Time plan

The proposed plan for completing my research is tabled as bellow;

Activities Duration

Oct. Nov. Dec. Jan. Feb. Mar. Apr May June

.

Selection of title X

Selection of study area X

Draft proposal writing X

Submission of proposal X

Questionnaire preparation X

Data collection X

Data coding and editing X

Data analysis X

Writing the report X

Submission of draft paper X

Submission X

4.2 Cost plan

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No. Item Unit Unit price Total cost(birr)

1 Pen 7 6 42

2 Paper 1 120 120

3 Writing & Printing 60 pages 5 300

4 Coping 50 pages 0.75 37.5

5 Telephone and internet 120 min 0.70 84

6 Transportation -- -- 220

7 Miscellaneous expense -- -- 100

Total cost 903.5

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REFERENCES

Kara bloom (June 2009), Asset and liability management for deposit taking microfinance
institution, Available at; http://www.cgap.org/gm/documet-1.9.34818/fn55.pdf

Bartle, Mc cord and bell (1995). Financial risk management in MFIS. UK. England.

Bruner, cendrowski, Mairw. Ward and price (2009) , concepts of financial risk on asset and
liability management (6thedi) pengium business.

Fannie janson Van Vuuren (2011), risk management formicrofinceinstution is South Africa.

Getanch G. (2005), Regulating microfinance in Ethiopia

Hietalathi, Jand LINDER, M (2006), socio-economic impact of microfinance and repayment

performance (4thed) stafrica.

Jeyanth k. (2003), financial sustainability for microfinance institution (9 thed) Nairob business
school.

Jony and water field (1998) business planning and financial modeling for MFI (5 thed) new York
business.

Lam, stulz, lore and borodoVISKY (2000, p.66) components of effective financial risk
management in MFI.

LEDGER WOOD Joanal (1997), microfinance hand book; an institutional and financial
perspective.

SUNITA (2003), concepts of financial risk in microfinance industry.

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 APPENDIX A

JIMMA UNIVERSITY

School Of Business and Economics

Department of banking and finance

Questionnaire prepared for Ambo microfinance officers

The aim of distribution and collecting this questionnaire is to assess the impact of financial risks
on asset and liability management in case of Oromia credit and saving institutions (OCSIs) in
Ambo branch. In addition this study also aims of the partial fulfillment of BA degree in banking
and finance. So that you’re kindly request to fulfill the following question appropriately. A gain
you will be confidential that your information will be secret.

NB

• Do not write your name.

• Make a thick mark (√) in the box which you think appropriated response on the space
provided.

• Fill the blank space provided in the following page.

• Demographic characteristics

• Sex male Female

• Age 20-30 31-40 41-55 above

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 • Education level 8-10 10-12 diploma degree

• Marital status A. single B. married

C. divorced/separated others

II questionnaire prepared for employees

• For how long are you an employee of this institution?

0-1 year 2.-4 year 5-7 year above

• For how long does your entity operated in the microfinance institution?

0-1 year 2.-4 year 5-7 year above

• Do you have a management information system?

Yes No Does your institution follow a cash flow management and

program; i.e. cash needs forecasting budgeting, etc?

• Yes B. No C. does not apply

• If yes for no 4 how it apply?

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-------------------------------------

• Have you encounter any financial risk that adversely affected your business over the last
two years?

• Yes B. No

• If yes for no 6 what sorts of financial risk(s) have you faced?

------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------

• According to your institution what is the most cost effective way to lower all financial

23
 risk?

• Corrective credit granting policy

• Better loan management system

• Improved internal control

• Better debt collecting on arrears clients

• Better educated staff

Rank the following financial risks as specifically oromia credit and saving institutions
(OCSIs) and use a thick mark (√)

Most threatening Less threatening

Credit risk
Liquid it risk
Interest rate risk
Portfolio risks

• What method do you use to prevent the financial risks in your MFI?

------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------

• Please mention factors or attributers that influence the asset and liability management in
oromia credit and saving institutions?

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 ------------------------------------------------------------------------------------------------------------
------------------------------

------------------------------------------------------------------------------------------

• What are the cost effective ways to manage financial

risk?------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------

• What are the ways to successfully predict the outcome of credit transaction?
------------------------------------------------------------------------------------------------------------
----------------------------------------------------

APPENDIX B

Questionnaire prepared for clients

• Have you received credit from the microfinance?

Yes No

• How many times have you received credit from the MFI?

• Once 3. Twice

• More than three times 4. Three times

• Which of these basic requirements did you have to satisfy before the loan was given to
you?

• Physical collateral 3. Guarantor

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 • Social collateral 4. Savings

• Do you think interest rate charged by MFI is appropriate?

• Yes B. No

• Are you able to repay the loan on schedule?

• Yes B. No

• If not for No 5 what is the reason for your failure to honor the loan on time?
------------------------------------------------------------------------------------------------------
---------------------------------------------------------

• What is the effect of your failure to repay the loan on

time?-----------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------

• Do you use all loans granted for your business activities?

• Yes B. No

• .Does your MFI have a forced savings program?

• YES B.NO

10. Do your MFI require collateral securities before granting loans?

A. YES B.NO

11. What are major challenges you face in accessing loan from MFIS?
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