This is one of the first reports written about the role of commercial banks in microfinance. The reason is simple: there has been little to tell because commercial banks have been so notably absent in this field. In their absence, microenterprise lending has developed on an alternative track through a large number of non-governmental organizations (NGOs) and other specialized financial institutions.
Dedicated to improving the lot of the poor in developing countries, these microlending NGOs first entered the microenterprise field in the 1980s, responding to the critical income and employment opportunities of their urban and rural clientele. Today some leading NGOs have created financial technologies that serve increasing numbers of the poor, generate repayment rates that compare favorably to many traditional commercial banks’ own loan performance, and have achieved increasing levels of sustainability, even to the point of outright profits without subsidies (Christen, Rhyne, Vogel, and McKean).
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It is a well-known fact that Value-at-Risk (VaR) models do not work under market stress. VaR models are usually based on normal asset returns and do not work under extreme price fluctuations. The case in point is the financial market crisis of the fall of 1998. Concerning this crisis, the BIS Committee on the Global Financial System [1999] notes that "a large majority of interviewees admitted that last autumn's events were in the 'tails' of distributions and that VaR models were useless for measuring and monitoring market risk." Our question is this: Is this a problem of the estimation methods, or of VaR as a risk measure?
