Abstract
Risk taking is described as an integral part of financial services. For micro-financing in particular, engaging in proactive risk taking is essential to their viability and long term sustainability. Maintaining a good strategy that ensures an optimal mix in risk-return trade-off is much more important for the microfinance banks (MFBs) that operate on a for-profit basis. Having faulted the value-at-risk technique which is common in the asset and liability literature, we introduce the multi-stage stochastic programming using econometric time series model. Specifically, for the scenario generation, we specify a VaR model with the inclusion of dichotomy regime which captures the multi-stage characteristics of assets. We use the liability derived investment (LDI) model to generate the liability series over the period of study. The optimization result showed that MFBs in Nigeria are by far more risk averse than they are profit seeking. This comes with the attendant effect of not being able to achieve the outreach and sustainability objectives to the fullest. MFBs in Nigeria need to look into their investment strategy with a view to structuring the mix and value of the balance sheet components at different periods to meet their stated objectives.
Highlights
A crucial part of financial services and of micro-financing in particular is risk taking
Maintaining a good strategy that ensures an optimal mix in risk-return trade-off is much more important for the microfinance banks (MFBs) that operate on a for-profit basis
Having faulted the value-at-risk technique which is common in the asset and liability literature, we introduce the multi-stage stochastic programming using econometric time series model
Summary
A crucial part of financial services and of micro-financing in particular is risk taking. As they perform their role of financial intermediation in the economy, microfinance organizations consciously take risks. Like all other financial institutions, microfinance organizations (MFOs) including microfinance banks (MFBs) face risks that they must manage efficiently and effectively for their survival and sustainability (Mangold, 2016). These risks include: credit risk, interest rate risk, liquidity risk, and operational risk. An MFB is not able to meet its social objective of providing financial services to the poor and quickly goes out of business when funds deplete (Ledgerwood, 1999; Dunford, 2000)
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