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Governance Issues in Microfinance

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This paper was presented at the International Year of Micro Credit Workshop on 15th December 2005. It is aimed at investors, directors, and managers of microfinance institutions and sets out to address why good governance is important to this audience. It is predominantly targeted at microfinance institutions that focus on financial services (loans, deposits, leasing, etc.) rather than those focused on non-financial services (classes on literacy, numeracy, nutrition, health, etc.) or business development.

The paper notes that good governance is important for the following reasons:

  • Prevent fraud and mismanagement
  • Promote sound decision making
  • Avoid costly fines and litigation
  • Create/maintain a positive corporate image
  • Attract and retain clients
  • Attract and retain financing and investment (from commercial banks)

Good governance is defined here as the process by which a board of directors, working through management, guides an institution in fulfilling its corporate mission and protecting the institution’s assets. It is noted that fundamental to governance is the ability of individual directors to work in partnership so that they can balance long-term strategic and short-term operational responsibilities. Good governance occurs when a board provides proper guidance to management regarding the strategic direction for the institution, and oversees management’s efforts to move in that direction.

The governance issues this paper explores are covered under the following headings- the dual mission: balancing social impact with financial objectives, Ownership of microfinance institutions, fiduciary responsibility of microfinance institutions, and risk assessment capacity in microfinance institutions.

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