Journal of Financial Risk Management
2012. Vol.1, No.3, 38-41
Published Online September 2012 in SciRes (
Copyright © 2012 SciRes. 38
Microfinance Risk Management with Work Breakdown Structure
Junxiang Liu
Asia-Australia Business College, Liaoning University, Shenyang, China
Received July 11th, 2012; revised August 24th, 2012, accepted August 23rd, 2012
Building inclusive financial system in China makes microfinance products become practical tools in
solving financial difficulties of small and medium enterprises (SMEs). Discuss general management risk
of microfinance under effective credit structure and then analyze the Work Breakdown Structure (WBS)
in microfinance management from the perspective of project management effectiveness. Moreover, use
ergonomics and probability theories to find out the effects on microfinance management through institu-
tions with simpleness and swift. It is demonstrated that optimization of microfinance management pro-
gram under inclusive financial sectors can probably be beneficial to microfinance credit risk control.
Keywords: Microfinance; Risk Management; Work Breakdown Structure
Inclusive financial sectors, which were designed to help cou-
ntries develop their own financial systems policies and strategi-
es to achieve the Millennium Development Goals, were a con-
cept raised by the United Nations in 2005, International Year of
Microcredit. Its core content was to enable all levels of society
access to a variety of financial services. Its programmatic docu-
ment was Building Inclusive Financial Sectors for Development
(United Nations, 2005).
At the primary stage of inclusive financial system, there is an
increase tendency in the number of microfinance institutions.
Moreover, these main bodies are moving in the direction to-
wards diverse elements and multilevel structure. It has provided
more opportunities to access to financial services for SMEs
(Chen, 2010). There is a significant improvement in availability
and proportions of banks loans for them. For instance, accord-
ing to the data collected by central bank of China in 2010,
41.8% of newly loans came from SMEs loans which had occu-
pied 30.7% of the total amount of loans.
Even though financial difficulties of SMEs, to some degree,
have relieved, it is still believed that microfinance risk for
SMEs is higher than that in ordinary commercial loans. In this
paper, probability theory and principles of ergonomics will be
used to analyze management of microfinance credit with pro-
ject management methods. The paper will finally demonstrate
that it is effective to reduce the risks of microfinance activities
through well-designed WBS.
Essential Characteristics of Project Management
in Microfinance
Inclusive financial system organically joins microfinance in-
stitutions, commercial banks and other formal financial institu-
tions together and builds a multi-level, wide coverage and sus-
tainable financial service system (Jiao, 2010). This makes
SMEs have more opportunities to choose financial services
suitable to their own specific conditions. These kinds of ser-
vices include direct and indirect financing, commercial loans,
small loans and so on. At present, some solutions like being
listed in SME/GEM Board and using corporate bonds have
settle financial difficulties of high quality SMEs ,whereas more
SMEs have to depend on loans from commercial banks or mi-
cro-credit funds from small-loan companies.
Credit Models in Microfinance
Commercial loans, which are in dominant position of indirect
financing, mainly depend on borrowers’ creditworthiness to
determine whether to lend or not and the amount of loans. Not
only has microfinance based on inclusive financial system
characteristic of social responsibility, but it has also character-
istic of commerce. In this case, the principles of commercial
credit must be followed. The models of commercial loans are
generally divided into joint liability loan and divided liability
loan (Table 1) (Zhao, 2004; Liu & Zhao, 2011).
Financing guarantee loan, joint guarantee loan and risk com-
pensation fund are based on market-oriented theory of credit
rationing in order to improve credit level for those whose credit
rating is not high enough to access to independent responsibil-
ity loan. Its essence is to find out a second repayment sources
apart from the first one, the borrower. It aims to reduce the
lenders’ risk. Muhammad Yunus, the Nobel Peace Prize winner
in 2006, is considered to be the funder of joint liability micro-
finance model, and ‘Solidarity Group’ system in the Grameen
Bank of Bangladesh is regarded as the most successful practi-
tioner in joint liability loan model.
Table 1.
Classification of Commercial Loans.
Independent Responsibility Loan
Divided Liability
Loan Independent Responsibility Loan +
Financing Guarantee Loan
Joint Guarantee Loan
Joint Guarantee Loan + Financing
Guarantee Loan
Credit Models in
Commercial Loan
Joint Liability
Joint Guarantee Loan + Risk
Compensation Fund
The Government raises risk compensation funds and estab-
lishes credit platform. These actions form a loan model that is
made up of joint guarantee loan and risk compensation fund. Its
essence is a kind of joint liability loan including governmental
credit. Once risk compensation funds set up, it can be regarded
as the third-party guarantor. The enterprises who apply for
loans have to deposit a proportion of reserve money into risk
compensation funds based on the amount of loans they get.
With expanding in size of loans, the size of risk compensation
funds increases and the leverage effect will be amplified (CCB).
Specifically, when a company applies for a loan and it is lack of
effective amount of guaranteed product, it can turn to risk
compensation funds. Then, the company will probably get a
higher credit line comparing to divided liability loan. If the
company cannot repay the loan or its liquidation of assets can-
not compensate the amount of loan, the rest part of the loan will
be repaid by risk compensation funds.
Project Management Process of Microfinance
The Project Management Body of Knowledge (PMBOK) is a
project management work of specialized content and workflow
definitions of the actual composition of the project management
standards. It defines that no matter products projects, services
projects or results projects, they can be divided into five stages
based on their life cycles, which are initiating, planning, im-
plementation, controlling and ending. The management of pro-
ject life cycle involves schedule, resource requirements, cost
estimates, risk management, procurement plan and so on (Bi &
Deng, 2002).
The difference between PMBOK and C-PMBOK is classifi-
cation of project risk management knowledge. In specific,
PMBOK classifies project risk management as a field while C-
PMBOK emphases it as a tool of other fields. This may be one
of the reasons that China’s projects’ risks and probabilities of
failure are higher than those in the United States.
General microfinance project management has several essen-
tial characteristics. At the initial stage, the lending body sets up
the timetable of beginning and ending for applicants’ projects
of loans. The stages of planning, implementation and control-
ling focus on risk evaluation of projects of loans and use ‘de-
termine whether or not to offer loans, the amount and period of
loans’ as the achievement of these stages. The ending stage will
be realized by completion of offering loans and calling in loans
at term.
Work Breakdown Structure (WBS) in
WBS is the synthesis tool in project management. Besides, it
is also the important work at the initial stage of a project and in
the center of planning stage. According to WBS, a project
forms several groups which consist of separated elements that
can be submitted. It summaries and defines the scope of the
project in a hierarchical mode that the work in each level has
detailed and operable definitions.
Work packages are the lowest level of project elements.
Generally speaking, work packages are the smallest results that
can be submitted and these results can be easily identified for
its activities, costs, organization and resource information. A
WBS used in project management must be broken down into
work packages and then it can be an effective management tool.
Work packages must be structured coding. It is easy to iden-
tify the hierarchies, classifications and characteristics of WBS
via coding system. To realize WBS structured coding depends
on WBS Dictionary, which fully describes and defines works in
WBS elements.
According to the basic principles of WBS, a given work can
be divided into several task units, called Task for short. A task
refers to a set of activities whose form and content is relatively
complete and indivisible and one can be done by operators. A
project can be a task or it can be divided into several tasks. The
tasks are the elements of the project.
Division of work refers to each operator in a project merely
do one task, not all tasks, and tasks arranged for each operator
are not the same. Division of key points refers to each operator
burdens the whole responsibility but focuses on different key
points. Each operator’s key points of responsibility point to
some of the tasks in a project and their key points of responsi-
bility are not the same.
For these reasons, the design of microfinance work package
follows not only the basic rules summarized in Effective Work
Breakdown Structure by Gregory T. Haugan, it also needs to
present the essential characteristics of microfinance institutions,
micro and quick. Moreover, microfinance work package em-
phasizes more on that each person is responsible for one WBS
item and the period of each work package is not over forty
hours and not in more than four levels (Haugan, 2005).
Basic Assumptions and Approach to Quality
Assessment of Microfinance Risk Management
The quality of any work consists of several interrelated and
mutually affected links or procedures, every of which may im-
pact the final quality more or less.
Principles of Ergonomics
1) Relationship between the Quantity of Work and Error
Probability: Based on the principles of reliability, it indicates
that any operator has an error probability in work
P, work
L and maximum work abilitym. Different operators
have different
L. In this paper, it assumed there is
relationship between the quantity of work and work error as
followings. When L >
L, the error probability goes up. If L
>m, the operator can barely avoid work errors. The quantity
of work for risk management of microfinance can be measured
by working time.
This assumption is obvious. When the quantity of work is
within the work ability, so long as the operator works carefully,
the error probability will be very low. However, no matter how
light the quantity of work is, the operator cannot make it with-
out errors. On the contrary, when the quantity of work is more
than an operator's work ability, ascending trend of errors will
occur with the increase of quantity of work. If the work an op-
erator do is beyond he can do, which means the quantity of
work is over the maximum work ability, there must be errors.
2) Inferences on the Relationship between Division of Work
or Key Points and Error Probability: According to the assump-
tion, when a project has excessive work, saying quantity of
work is over, if division of work comes up, each operator’s
work decreases, which is helpful to reduce error probability.
Similarly, division of key points makes operators focus on their
own tasks so that they are able to lower error probabilities of
these tasks.
3) Reliability of Work Result: After the analysis above, reli-
Copyright © 2012 SciRes. 39
ability closed relates to work ability that is measured by prob-
ability and mathematical statistics methods. There are several
characteristics of reliability of work result.
Degree of Reliability: the probability that an operator fin-
ishes a project within the time and given conditions. It is a
function of working time, which is called degree of reli-
ability function.
Probability Density and Distribution Function: if random
variable indicates the time from beginning to work error hap-
pening, its probability density is()
t; if t indicates a certain
time, the degree of reliability is the probability that an operator
has not made any mistake within t and it is also the probability
when there is T > t. (You, Zhang, & Du, 2003)
() ()()
RtPTtf tdt
is the distribution function of :
() ()()
t (2)
Because work with errors and work without errors are com-
plementary events, it can be presented as:
()() 1Rt Ft (3)
λ()() ()()()tFtRtftRt
The value of is similar to λ()t
Analysis of the Principle of Work Organization
1) Probability Analysis of Errors Happening in Simultaneity
between Two workers: For two given workers, WA and WB, the
event WA makes mistake is A while the event WA does not make
mistake is A. Similarly, the event WB makes mistake is B and
the event WB does not make mistake is B. Suppose there is a
project W, the error probabilities of WA, WB are and
, respectively. The probability that errors happen in si-
multaneity between WA and WB is .
It can be seen from
() ( )()( )()PAB PABPB PBAPA
that the simultaneous error probability of two operators is not
larger than that they make mistakes separately. However, this
formula does not show the relationship between A and B. Inde-
pendence in work cannot guarantee independence in error
The relationship between A and B can be showed as:
For two given random variables and
0, 1X
0, 1Y,
when the event A happens and when the event
A happens. The same as Y Yr to the events
B and B, respectively. So,
nd 0 re1 afe
. Plus
(1)(PX PA
and the expect value of X is (Sheng, Xie & Pan,
() ()EX PA
Similarly, (1,1)X Y, () ()EY PB
Suppose is the coefficient of X and Y, is the
variance of X and is the variance of Y. In addition, ()DY
( )()()DX PAPA and () ()()DY PBPB.
Combine the formulas:
 () ()()(EXYEXEY COVXY)
(,) λ()()COVXYDXDY (6)
it gets a result:
The error probability of two operators is related to individual
error probability and their coefficient of error, which is about
their knowledge. The more similar their knowledge is, the lar-
ger their coefficient will be. Therefore, it is important in prac-
tice to make the members of a work team have less similarity in
their knowledge, but more complementary.
2) Analysis of Division of Work and Key Points: A given pro-
ject has n + m tasks and it is done by WA and WB independently.
The simultaneous error probability of these two workers is
P(AB) and the total number of error tasks is .
Suppose the project is done via dividing work, WA is mainly
responsible for n tasks and WB is mainly responsible for the rest
m tasks. Individual error probability changes in this way. For n
tasks, the error probability of WA turns to
() (
Similarly, () ()
. In n tasks;
n nnn
and in m tasks,
m mmmm
The total number of errors is :
() (
nn mm
nP ABmP A B)
So, when and ()
PAB ()PAB ()
() ()(
nn mm
() (11)
PAB PABand ()
nn mm
nP ABmP AB (12)
Based on the assumption, if a project has overload work, the
error probability is higher. As known from the inference, the
error probability will probably be lower with division of work.
This means individual error probability is lower than the si-
multaneous error probability of two workers without division of
work. However, this conclusion has a precondition which is
overload work. If the precondition is not satisfied, neither sig-
nificant enhancement in quality of work for individual nor low
simultaneous error probability can be realized with division of
work. Consequently, it is crucial to organize work in a reason-
able manner (Liu, Zhao, & Wang, 2003; Ruan, Huang, & Cai,
The management process consists of four functions, which
are planning, organizing, leading and controlling, and each
function is mutually linked and mutually influenced. WBS
belongs to the function of organizing and it reflects its charac-
teristic. WBS provides structural guarantee for management. In
such structure, all activities for achieving the goals are divided
Copyright © 2012 SciRes.
Copyright © 2012 SciRes. 41
into several groups and formed work units can be done by au-
thorized operators, establishing the rules for upper and lower
level, between the horizontal levels. It is also the precondition
to realize the functions of leading and controlling in manage-
Based on above analysis of essential characteristics of WBS
and theory of ergonomics in quality of work, the microfinance
risk management with WBS can be designed as Table 2.
In this paper, although microfinance with WBS contains all
Table 2.
Microfinance with WBS.
Class A Class B Class C Class D
Manual work
Initial collecting
information Systems
responsibility loan
Divided liability loan Financing guarantee
Financing guarantee
Joint guarantee loan
Joint liability loan
Acceptance of
Investigation Review the items
Risk examination
Examination of
A sum of
Execution of loans Management of after
nding leRegular audit
events from before lending to after lending and its nature of
commercial loans and essential characteristics, it still need to be
tested and improved in practical microfinance in inclusive fi-
nancial system.
Bi, X., & Deng, T. (2002). Essentials of project management. Beijing:
Chemical Industry Press.
CCB (2008) Shenzhen: Put 15 billion to solve SME financing problems
within 5 years.
Chen, M. Y. (2009). Number of SMES in China exceeded ten million.
Jiao, J. P. (2010). The importance of building inclusive financial sectors.
China Finance, 688, 12-13.
Haugan, G. T. (2005). Effective work breakdown structures. Beijing:
China Machine Press.
Liu, B. D., Zhao, R. Q., & Wang, G. (2003). Uncertain programming
with applications, chapter 4: Random variables (pp. 32-34). Beijing:
Tsinghua University Press.
Liu, J. X., & Zhao, Y. H. (2011). The analysis of credit structure op-
timization model based on joint liability. In Review on oversea re-
searches: Proceedings of the 3nd international conference on fi-
nancial risk and corporate finance management (pp. 592-597). Da-
lian: Dalian University of Technology Press.
Ruan, J., Huang, Z. X., & Cai, Z. J. (2000). Applied mathematics,
chapter 5: Basic probability theory (pp. 297-353). Beijing: Science
Sheng, J., Xie, S. Q., & Pan, C. Y. (2008). Probability and mathematic-
cal statistics, chapter 1: Basic concepts of probability theory (pp. 1-
23). Beijing: Higher Education Press.
United Nations (2005). Shaping, the “Blue Book” on building inclusive
financial sectors for development. An issues paper for the global
meeting ILO headquarters, Geneva.
You, J. X., Zhang, J. T., & Du, X. M. (2003). Quality management Tech -
nology of reliability (pp. 208-214). Beijing: Science Press.
Zhao, Y. H. (2004). Methods study on risk control of credit manage-
ment, chapter 6: Risk control of credit contract. Doctoral Disserta-
tion, Shanghai: Tongji University.