ORIGIN OF CREDIT RISK

Given the nature of the microfinance business, the most common risk facing the
microfinance service provider is Credit Risk. Credit risk arises from the potential
that an obligor is either unwilling to perform on an obligation or its ability to perform
such obligation is impaired resulting in economic loss to the institution.

In the course of conducting microfinance business, microfinance service provider

assume risks in order to realize returns on their investments. On the other hand,
risks assumed have the potential to wipe out expected returns and may result
into losses to the microfinance service provider. These losses could be either
expected or unexpected. Expected losses are those that microfinance service
provider knows with reasonable certainty will occur (e.g. the expected default rate
of loan portfolio) and are typically reserved for in some manner. Unexpected losses
are those associated with unforeseen events (e.g. losses due to a sudden downturn
in economy, falling interest rates, natural disasters, or human action such
as terrorism). Microfinance service provider rely on their capital as a buffer to absorb
such losses.