Risk Management and Performance of Microfinance Industry

Abstract

Purpose: The purpose of this study was to understand the significance of the relationship between risk management and sustainability of the microfinance industry. Furthermore, how does effective risk management could be used towards sustainable growth in microfinance. The findings of the study revealed that there is a positive relationship between risk management and sustainability of microfinance industry.
 Design /Methodology/Approach: The study was conducted in three administrative districts in Sri Lanka, using 376 MF female borrowers, who represent from different businesses. The cluster sampling technique was selected for the survey. Primary data was collected using personally administered questionnaires and the sample frame was selected from two leading MFIs that consented to participate in the research. The conceptual frame work was developed based on the two variables risk management and sustainability of the microfinance industry. Simple liner regression analysis was taken to determine the significance of the relationship. 
 Findings: The study was able to find a positive relationship between effective risk management and industry sustainability. It was observed that that effective implementation of risk management process in the industry would certainly essential for long-term sustainability of microfinance institutions (MFIs). The findings showed that there were several strategic management measures that could have been put in place by key stakeholders in the industry.
 Research, Practical & Social Implications: The study found that although there has been potential growth in the industry vulnerability is very highly compared to other industries. Instead of the growth potential, MF is fighting for survival and sustainability. Mission drift, commercialization, and a lack of understanding among stakeholders, negatively impact the sustainability of the microfinance industry. It is significant to keep pace with the inculcating risk management culture among key stakeholders in the industry. Microfinance Institutes, Female Borrowers, Regulators. If not combined with the development of social capital, the financial programs have the possibility of creating a divided, dependent and unsustainable community.
 Implications/Originality/Value: To the best of the authors’ knowledge, no study has been conducted on uncovering and exploring the significance of the relationship of two key variables in microfinance industry. Most of the previous studies discussed these factors in isolation not as a collective wisdom to find a solution. This article is an industry contribution for inculcate risk management culture among stakeholders in microfinance and enhance different approaches to promote financial literacy levels of female borrowers who are key to sustainability in the industry.