One of the most significant risks that an MFI incurs is operating risk. The nature of staff activities, high levels of decentralisation and vulnerability of the client sector expose an MFI to high levels of operating and credit risk. Risk is inherent in the life of institutions, but they must adopt a risk management strategy that mitigates the possibility of risk, and manages the negative effects when things do go wrong.

A strong internal control system – trained and motivated staff, policies and procedures (that address segregation of duties and independent checks), and an efficient, timely management information system is the best antidote to fraud and loss in an MFI. An internal audit process ensures that there is compliance to policies and procedures and evaluates the operations of an MFI from a risk-based perspective. Internal audit is an important part of the risk management feedback loop. This toolkit developed with MEDA includes the following topics: