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

This paper was commissioned by the Microcredit Summit Campaign in 2006.The paper explores the what, why, how and who of microfinance governance. The paper uses the risk management paradigm to emphasize that poor corporate governance is a major risk to the sustainability and viability of microfinance institutions (MFIs).It argues that:

• Board systems and procedures do not guarantee effective governance of MFIs;
• MFI boards need to evolve from advisory or 'rubber stamp boards' to strategic boards that:
  • Are catalysts, initiating, influencing, evaluating and monitoring strategic decisions and actions of management,
  • Hold management responsible and accountable for the performance of the institution;
• MFIs have to establish internal and external mechanisms that will attract, empower, motivate, retain and renew their boards;
• There is a need for external oversight systems that promote the practice of governance in MFIs.

The paper concludes with the following recommendations:

• The MFI industry should develop a Code of Corporate Governance that would ensure the subscription and compliance of every MFI;
• Sanctions for non-compliance should be applied at a country/ regional level;
• Resources (financial and technical) should be committed to developing the capacity of boards;
• Donors 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 MFIs;
• There is need for more research into the impact of governance on the performance and sustainability of MFIs.