Governance, Transparency and Accountability

This document assesses the current state of fiduciary governance of the microfinance investment fund (MFIF) and proposes practical ways and means to improve it. The paper examines:

• Exogenous factors affecting investment professionals, such as its poor regulatory environment and the need to define this new asset class;
• Endogenous factors related to the daily practice of fiduciary managers and their ability to meet the contractual expectations of investors.

The paper discusses:

• Five different social hazards weakening fiduciary practice and threatening its credibility among institutional investors;
• The financial and social factors that blur the asset class and make the risk level difficult to set for outside investors;
• The debate whether microfinance investment should be market or mission oriented;
• The uneven standards applied by the MFI rating;
• The lack of a common risk management denominator for funders.

The paper finds:

• Fair to poor fiduciary practice among fund managers;
• A lack of performance valuation and presentation standards;
• The fact that some emerging MFIF professionals do not distinguish the wide risk disparity between equity and fixed-income management in microcredit;
• Best fiduciary practice as critical in meeting the three key conditions of governance, transparency and accountability;
• That the current weak state of practice might trigger casualty and stigma.

The paper recommends five major lines of action including a road map prescribing fiduciary rating for all management firms offering MFIFs and the proclamation of a charter of fiduciary rights.