Corporate Governance in Microfinance: Credit Unions

This paper argues that weak governance has constrained the development of credit unions in microfinance. The paper explains why corporate governance of credit unions is difficult and further presents various mechanisms and research areas that could help solve this problem.

The paper states that:

• Credit union governance experiences conflicts between:
  • ‘Net savers’ and ‘net borrowers’;
  • Owners and managers;
  • Members and their elected board of directors;
  • Employees and volunteers.
• Credit unions also experience problems of governance related to growth, change in the nature of membership, the increasing complexity of products, etc.
• Attention to the following four mechanisms would help solve the governance problems of credit unions:
  • Intentional and specific mechanisms such as the constitution of the board of directors and rewards given to managers;
  • Spontaneous and specific mechanisms such as corporate culture, cross-control between managers and informal trust relationships;
  • Intentional and non-specific mechanisms such as the legal framework, the role of legal authorities, etc.;
  • Spontaneous and non-specific mechanisms such as the environment of the firm, the social and political environment, etc.

The paper concludes by recommending research that can help credit unions provide good governance and experience growth, without compromising on their essence. This research would look into:

• The networking structures of credit unions;
• The relationship between governance and growth;
• Suitability of mechanisms.