Managing credit risk in rural financial institutions: what seems to work
Authors: Wenner, Mark D.; Navajas, Sergio; Trivelli, Carolina; Tarazona, Alvaro
Source: Enterprise Development and Microfinance, Volume 18, Numbers 2-3, June/September 2007 , pp. 158-174(17)
Publisher: Practical Action Publishing
Abstract:Rural areas are largely unbanked due in part to perceptions of high credit risk. Agriculture remains the main livelihood activity for many but it is inherently more risky than other sectors due to vulnerability to climatic shocks and commodity price volatility. Accordingly, many financial institutions do not see an attractive risk-return ratio and shy away from rural areas in general and from agricultural lending in particular. This article examines how a sample of rural financial institutions in Latin America views credit risk, how they manage it, and how well they fare in the process as measured by key financial performance indicators. It concludes that there are a set of common principles that can be applied in credit evaluation processes to select low-risk borrowers and that through portfolio diversification strategies and the establishment of portfolio exposure limits to agriculture, acquired risk can be managed and coped with at the institutional level. Unfortunately, risk transfer instruments are little used and generally unavailable. Much can be done to improve the situation. None- theless, nearly all institutions in the survey saw market opportunities, and the most successful institutions were growing fast and generating profits.
Document Type: Research article
Publication date: 2007-06-01
- Enterprise Development & Microfinance provides a forum for those involved in the design and implementation of enterprise development and microfinance programmes in developing countries. With themes such as the sustainability of microfinance institutions, the impact of poverty on clients and producers and value chain development it is essential reading for managers of projects, providers of technical assistance, consultants to projects, policymakers and the staff of donor agencies.
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