Managing Risk for Sustainable Microfinance

Abstract

Sustainable micro-finance depends on the appropriate management of credit risk. However, small and micro businesses (SMBs) tend to offer little information on their default probability, which poses serious challenges for their micro-finance needs. Given the tremendous socioeconomic impact of SMBs, it is essential that they receive appropriate guidance. The current situation is not sustainable – sometimes lenders charge excessive interest or withdraw funding if limited by regulatory ceilings; sometimes lenders underestimate SMB credit risk, through an insufficient understanding of intrinsic risk. To alleviate this problem, we propose an insurance framework to determine the feasible range of insurance premium.

Keywords: Insurance, Microfinance, SMB

JEL Classification: G22, O43