Chaos Theory and Risk Assessment in Microfinance Institutions: A Systematic Literature Review
Abstract: The Kyoto Committee clearly understood the larger ramifications of Edward Lorenz's Chaos theory, when they described it "as the boldest scientific achievement in discovering 'deterministic chaos', a principle which has profoundly influenced a wide range of basic sciences and brought about one of the most dramatic changes in mankind's view of nature since Sir Isaac Newton". Over time the theory entered almost every field including finance and banking. This study examines the relevance of chaos theory to risk assessment in microfinance institutions. Using a systematic literature review, it considers how nonlinear dynamics, sensitivity to initial conditions, feedback loops, tipping points, and recurring patterns can improve understanding of risks that conventional linear approaches may not fully capture. The review identifies concentrated client exposure, borrower vulnerability, liquidity and funding pressures, human-capital constraints, social and political disturbances, regulatory changes, and macroeconomic contagion as important areas in which relatively small disturbances may produce disproportionate consequences for microfinance institutions. A chaos-informed perspective may support more frequent monitoring, early-warning mechanisms, adaptive stress testing, portfolio diversification, and resilience planning. The review also indicates that chaos theory should complement rather than replace established risk-management methods because practical application is constrained by data availability, model complexity, and noise. Overall, integrating selected chaos-theory concepts with conventional and computational risk tools may strengthen adaptive risk assessment in microfinance institutions. Methodology: This paper adopts a structured literature review approach focussing on peer reviewed journal articles, conference papers, books, magazine articles and other authoritative reports on the subject.
Keywords: Chaos theory; Microfinance institutions; Nonlinear risk; Risk assessment; Butterfly effect; Feedback loops; Financial resilience; Financial inclusion, Microfinance
How to Cite?: Aarav Dadu, "Chaos Theory and Risk Assessment in Microfinance Institutions: A Systematic Literature Review", Volume 15 Issue 10, October 2026, International Journal of Science and Research (IJSR), Pages: 47-61, https://www.ijsr.net/getabstract.php?paperid=SR26928221135, DOI: https://dx.doi.org/10.21275/SR26928221135