Corporate Governance in Microfinance Institutions

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Corporate Governance in Microfinance Institutions

As microfinance institutions (MFIs) scale up and commercialize, proper MFI governance becomes increasingly important. The Board of directors is ultimately responsible for the level of risk assumed by the institution and good MFI governance plays a crucial role in product development, technological advancement, and more importantly, crisis management of the institution. The MFI needs a board of directors that understands the underlying economic, competitive environment, tempers growth in line with market conditions, and that can assist management in the development of a long-term strategy and processes to keep pace with lending during periods of rapid and diversified expansion.

Several factors give rise to governance concerns- the growth and scale of MFIs, emergence of legal and regulatory gaps, increasing industry risks (foreign exchange risk, product diversification risk, client risk, political or operational risk), and diversification of MFI structure and type. As the MFI evolves and matures, investor due diligence, rating agencies, and other organizations assessing the sustainability of the MFI look closely at its governance capacity during evaluation.

This document highlights why good governance is of critical importance to MFIs, how corporate governance differs across institutional type and maturity, and discusses the main issues and risks that the Board needs to address during the MFI’s evolution.

Written by: Pasquale Di Benedetta, Ira W. Lieberman Ph.D., and Laura Ard. Jun 2015.