During the work in several MFIs, PPP has seen that there is frequently a lack of understanding what risk management means and what aspects it involves. Sometimes risk management is seen as the ability to trade and take risk to increase the returns, sometimes risk is just seen as a set of policies that are required but don’t provide a broader sense. For that reason, PPP has developed an approach that takes the myths away from risk management and focuses on the key functions that are expected from risk management.
Based on the experience in working with MFIs in almost all regions of the world over several years, PPP developed a highly individualized approach to Risk Management, grouped into six modules:
- Risk Culture: The current financial crisis shows in a clear way that no Financial Institution can operate successfully without having a full risk culture established. This relates to the idea that every employee, every product, every process needs to reflect the fact that Financial Institutions generate revenues from taking risks. Those risks need to be understood by every employee and every stakeholder of an MFI.
- Policies and Guidelines: PPP develops a modular set of policies and guidelines for the institution. For this exercise PPP uses own experience as well as the existing policies of the institution.
- Structure: PPP implements a well developed structure to the MFIs risk management organization. That includes organizational setup, definition of responsibilities, and qualifications.
- Reports: starting with a set of standardized reports PPP adjust them to the needs and particularities of the MFI.
- Models: as the institution grows, the application of models becomes necessary.
- Risk Management Services: in a final level, PPP provides tools and instruments to manage risk. The MFI can calculate the risk exposure based on models and PPP helps analyzing and advising on the appropriate steps to manage the risk.
Set up of Project
All steps (six modules) are accompanied by the necessary seminars and training. We also try to adjust our work to the domestic regulations including potential applications of the Basel 2 rules if deemed appropriate and necessary.
- Module 1: Risk Culture
PPP provides a general introduction to Risk Management in the form of seminars and presentations adjusted to the respective audience, from the fro office employee to the board member. We also train to the board and the management of the institution individually or as a group. PPP also analyzes the status of the Risk Management function, makes proposals about how to align the current risk management structure to the current status of the institution as well as how to grow Risk Management along the line of the overall business plan.
- Module 2: Policies and Guidelines
The concept is modular and pragmatic and by that allows to be amended over time. The start is in the form of a “General Risk Management Policy” which will expand over time to individual policies.
- Module 3: Structure
PPP defines the escalation mechanisms and practice with the staff. If necessary PPP also help in the selection process, including the necessary interviews and qualification tests.
- Module 4: Reports
This is usually an iterative process which shall ensure that the respective recipients in the institution understand and appreciate the reports. As the background of senior management usually varies, the amount of individualization can be high. The reports are based on data provided by the MFI’s MIS.
- Module 5: Models
Models use data provided by the institution, as well as external market data and benchmarks to measure risks like Liquidity Risk, interest rate risk, loan-portfolio risk. These models are developed by PPP and will be adjusted to the institution.
- Module 6: Risk Management Services
PPP can recommend and structure derivative hedging instruments and help brokering such instruments with other banks.