Principles and Practices of Microfinance Governance

Microfinance institutions (MFIs) are expanding their outreach, increasing their assets, and becoming regulated entities that can capture savings deposits. During this transformation effective governance is crucial.

Governance is a process by which a board of directors guides an institution through its management to fulfill its corporate mission and protect the institution's assets. Fundamental to good governance is the ability of individual directors to work in partnership and for the board to provide proper guidance to management regarding the strategic direction for the institution, and oversee management's efforts to move in this direction. The interplay between board and management centers on the relationship between strategy and operation, both of which are essential for the successful evolution of the institution.

Major board responsibilities can be grouped into the following categories:

• Legal obligations: ensuring compliance with the institutions bylaws, procedures, and other legal requirements;
• Management accountability: hiring competent professionals, establishing clear goals for these executives, closely monitoring their performance, and confronting weaknesses when they surface;
• Setting policy and providing strategic direction to the MFI.

The board should exercise its responsibility by:

• Maintaining distance from daily operations;
• Drawing on the institutional memory of the directors;
• Making binding decisions as a group;

The paper concludes by identifying three areas related to effective governance that require further analysis:

• Conflicts of interest such as the ability to fulfill the duty of loyalty and the practice of reciprocal board service;
• Ownership considerations on microfinance boards which already comprise of a diverse range of people and are becoming more so;
• The effect of rapid change in microfinance caused by competition, movements towards the commercial model of microfinance, and increased participation by governments in MFIs' board composition, incentives, functions, and leadership.