Risks Assessment and Mitigation in Micro Finance Lending in a Post-Conflict Environment: The Case of the Northern Province in Sri Lanka

Abstract

The main objective of this paper is to assess the vulnerability and risk related to the loan schemes being implemented by MFIs/Banks in the north. The methodology that was adopted includes a mixture of qualitative and quantitative research methods. It constituted of participatory social research and questionnaire survey methods. As far as risks faced by financial institutions are concerned operational risks are rated as very significant. According to the findings of the study, the common risk management practices adopted by the financial institutions are character assessment, forced savings, and eligibility requirements. Recommendations for credit risk reduction can be considered from two points of views: (1) reduction of the credit risks of the borrowers and the reduction of credit risks of the MFIs. The paper proposed certain general recommendations as well as specific recommendations for MFIs to deal with credit risk.

Keywords: Microfinance, Credit risk management, Post-war conflict