Microfinance Horizon

Author: Maria Giovanna Pugliese

Executive Summary:

The MFI sector is currently undergoing a profound transformation. From small, non-profit, donor-funded social enterprises mainly focused on the provision of “simple” credit products to a relatively homogenous set of clients, many organizations are transitioning towards rapidly growing for-profit corporations, offering a multitude of products to a rapidly changing and increasingly diverse constituency.

In the course of transformation, new stakeholders are brought on board, including professional investors, equity partners and capital markets lenders. Each of these stakeholders brings his or her own objectives and expectations. As a result, new operational challenges and conflicts of interest emerge.

Corporate governance can be defined as a set of relationships between a company’s management, Board, shareholders and other stakeholders. It encompasses the processes through which a company’s objectives are set and achieved, and the structure through which stakeholders’ interests are managed.

The financial crisis has given rise to a heated debate about the corporate governance of large banks, and has emphasized its fundamental role in the management of change, the resolution of conflicts of interest and the prevention of crises. Through good governance, institutions can uphold and reinforce ethics in their operations and business models, while at the same time enshrining professionalism in their organisational structure.

The debate has resulted in concrete recommendations on the corporate governance of large banks. When allowances are made for size and complexity, many of these can be interpreted as directional good practice for any financial institution. Thus, microfinance institutions would be wise to focus on the following key areas:

• The Board of Directors

a) Role and Responsibilities of the Board of Directors

b) Board Size, Composition and Qualifications

c) Practices and Structure

• The Role of Institutional Shareholders

• The Governance of Risk

• Executive Remuneration

• Other Corporate Governance Issues:

a) Transparency and Disclosure

b) The Role of External Service Providers

c) Complex Group Structures

In microfinance, much of the discussion on corporate governance has focused on principles arising from the sector’s non-profit origins and social orientation. However, enshrining social goals into governance only becomes relevant once an institution adheres to the fundamental principles of good governance necessary for success.

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