Risk taking is described as an integral part of
financial services. For micro-financing in particular, engaging in proactive
risk taking is essential to their viability and long term sustainability.
Maintaining a good strategy that ensures an optimal mix in risk-return trade-off
is much more important for the microfinance banks (MFBs) that operate on a
for-profit basis. Having faulted the value-at-risk technique which is common in
the asset and liability literature, we
introduce the multi-stage stochastic programming using econometric time
series model. Specifically, for the scenario generation, we specify a VaR model
with the inclusion of dichotomy regime which captures the multi-stage
characteristics of assets. We use the liability derived investment (LDI) model
to generate the liability series over the period of study. The optimization
result showed that MFBs in Nigeriaare by far more risk averse
than they are profit seeking. This comes with the attendant effect of not being
able to achieve the outreach and sustainability objectives to the fullest. MFBs
in Nigeria need to look into their investment strategy with a view to
structuring the mix and value of the balance sheet components at different
periods to meet their stated objectives.
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