Even the most mature microfinance institutions (MFIs) need to pay attention to their balance sheet to manage financial risks. All financial institutions take risks to make money. Risk management helps determine the appropriate balance between risk and reward. As MFIs diversify their funding sources, sound asset and liability management (ALM) is critical to help MFIs assess and manage financial risk.
The current global financial crisis highlights the importance of good ALM. As funds become increasingly scarce and expensive, liquidity management becomes ever more important. The crisis has also underlined issues around leverage: while increased borrowing can help an institution increase its returns, it also exposes the institution to greater risk (as the many overleveraged institutions caught up in the current crisis know all too well).