Library

Governance: Organising, Developing and Empowering Boards to Oversee MFI Operations

Governance is still a relatively new concept in microfinance and its evolution is characteristic of the challenges that all industries face as they develop. At start up, businesses are preoccupied with vision setting, setting up systems, mobilizing resources and developing market entry strategies. At this stage, scant attention is paid to governance. At the next stage organizations are concerned with balancing growth with profitability. As the organization matures and new owners enter the business, then governance issues begin to emerge. According to the author of this paper, there is growing awareness about the need for effective governance in microfinance institutions, but it has not attracted the same level of concern and scrutiny as other issues such as growth capital, outreach, sustainability and impact. Governance is the least discussed, least researched and least funded issue in the microfinance development arena. Funding is available for product development, innovations, commercialization, transformation, regulation, capacity building, but virtually no funding is dedicated to strengthening of governance structures and systems in microfinance.

This writer believes that poor governance is the greatest risk that threatens the sustainability and viability of the microfinance industry. In this very readable paper she examines the purpose and scope of corporate governance and suggests that good governance for financial institutions is built around risk management. She goes on to discuss institutional risks, fiduciary responsibility and operational risks, including fraud, theft, human errors, credit risk and inefficiency. A 2004 evaluation study conducted among MFIs in East Africa apparently concluded that fraud and outright theft were common in many MFIs and that donors perpetuated these situations because they continued to pump money into organizations that had failed to account for previous funding. Although they have less control over them, boards should also assess the external risks to which they are exposed, e.g. regulatory risk, competition risk, demographic risk, physical environment risk and macroeconomic risk.

The author goes on to examine ways in which boards can be empowered to perform their duties more effectively. She reviews selection methods and training and then emphasises the importance of information: “Board members are the public face of the institution and must therefore be equipped with adequate and timely information about the organization.” Mechanisms for updating board members include regular bulletins, regular briefings by the CEO, internal marketing to board members whenever a new product or branch is launched and regular board reports.

Finally the author recommends the following steps to enhance the board empowerment process in unregulated MFIs:

• The MFI industry should develop an industry-wide Code of Corporate Governance to which every MFI should be required to subscribe and comply. Sanctions for non-compliance should be applied (e.g. blacklisting and publishing the names of rogue MFIs). This is best done at country /regional level.
• Resources (financial and technical) should be committed to developing the capacity of boards.
• Donor and investors should encourage and monitor the status of corporate governance in all institutions they support.
• Clients and shareholders should be educated and empowered to monitor and demand sound governance from microfinance institutions.
• There is need for more research into the impact of governance on the performance and sustainability of MFIs and case studies on governance developed and disseminated.

• Resource type Paper
• Author Sabana, B.
• OrganisationMicrocredit Summit Campaign
• Year of Publication2006
• RegionGlobal
• LanguageEnglish
• Number of pages38 pp.
• Keywords Governance, Risk Management