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The Practice of Corporate Governance in Shareholder-Owned Microfinance Institutions

Topic :

Shareholder-owned microfinance institutions (MFIs) are playing an increasing role in the delivery of financial services to the poor. Shareholder-owned MFIs are for-profit, limited liability companies, whose ownership is in the hands of multiple (mainly private) shareholders. Most are licensed financial institutions – finance companies and banks. Many are deposit takers.

This paper on corporate governance for shareholder-owned MFIs aims to provide practical guidance for stakeholders in governance – investors and prospective investors, board members, and senior MFI managers – to use in assessing the governance of their own MFIs. The guidelines have been developed by the Council of Microfinance Equity Funds (CMEF). During the course of preparing the paper, the CMEF consulted with investors from CMEF member funds, MFI board members, MFI executive directors, microfinance experts, and corporate governance experts who exchanged views in order to arrive at a consensus.

The paper begins by briefly considering the notion of sound governance, setting out its functions and the key actors involved. It then also considers the responsibilities of directors and highlights that their major responsibilities reflect the broad purposes of governance.

The first main section of the paper looks at special considerations for shareholder-owned MFIs. It then moves onto to cover the structuring of an effective board. Here it discusses board size, composition, appointment period, conflict of interest policy, and responsibilities of the board Chair and CEO, amongst other items. Following this the paper also sets out effective board procedures, which looks at board meetings, committees, and information and disclosure. Guidance for key board decision making is also provided – this includes major strategic decisions, oversight and compensation, as well as board disputes and the role of the board in crisis.

The paper ends with a brief discussion on the evolving nature of good governance. It stresses that good governance is not automatic and must be developed over time. It highlights four key processes the board must pursue to improve their own functioning:

  • Board training
  • Board retreats
  • Opportunities to observe the business and talk with clients
  • Self-evaluation

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