Over the past several decades, microfinance has been viewed in somewhat idealist terms. But it has now entered the realm of an industry that embraces consumers, institutions, regulators, donors, investors, and other stakeholders. As any evolving industry, it faces new challenges that can give rise to financial crises, questionable operating practices, and control issues. As a result, experts are calling for the introduction and/or strengthening of corporate governance standards in microfinance institutions (MFIs).

What is corporate governance?

It is a system that refers to rules, people, processes and procedures of a legal business entity that govern the entity’s operations, regulations and controls. Corporate governance provides a structure that guides an organization towards achieving its goals, vision and mission, and defines the roles and relationships between management, the board, clients, and stakeholders. To that end, organizations with high corporate governance standards help protect consumers, organizations, investors, employees and the other participants.

To this end the Council of Microfinance Equity Funds – the first membership organization to bring together the leading private entities that make equity investments in microfinance institutions – has recently updated its well-known document, The Practice of Corporate Governance in Microfinance Institutions, originally draft in 2005. According to the Center for Financial Inclusion, the original document was intended for two reasons in particular: To address the lack of existing guidance designed specifically for the unique characteristics of MFIs, and to extend beyond the ultimately impractical generalizations often utilized when discussing MFI governance. The new document builds on these original issues and provides new or expanded guidance regarding legal structures, social performance management, the alignment of incentives, making responsible exits, and risk management.

The World Microfinance Forum Geneva is getting involved in the discussion as well and recently created a working group tasked with developing 10 easy-to-measure good governance metrics which can be utilized to analyze the state of the industry in this regard. The completed list was largely focused on the state of the Board of Directors, and included indicators such as the number of independent board members, the qualifications of the board members, the frequency of board meetings, the separation of the CEO and the Chairmanship, and the presence of risk management and audit functions.

The Microfinance Information Exchange (MIX) conducted a survey in 2011 to measure governance in microfinance. The survey tested a new set of governance indicators recruited a sample of 162 MFIs across 57 countries to seek out data regarding the state of governance. Among the notable results was a positive correlation between risk management functions, internal auditing, and Board committees; suggesting that good MFI governance procedures do not exist in isolation from each other. In addition, MFIs of a wide variety of sizes and in a wide variety of locations were found to have relatively independent boards. Interestingly, however, there was no correlation found between governance and financial performance, although the authors were quick to note that the small sample size and lack of historical data rendered this result far from authoritative.

The Fundacion Microfinanzas BBVA took a further step in publishing in 2011 The Universal Corporate Governance Code for Microfinance Institutions, which contains a series of good practices, standards and principles in accordance with generally accepted international standards. The publication defines good corporate governance and covers the roles and responsibilities of the board of directors, the management,

On a similar note, Philippe Serres of the Agence Francaise de Developpement (AFD), was recently interviewed by Microfinance Focus regarding an issue tied inextricably to corporate governance: how to promote financial transparency among microfinance institutions in Sub-Saharan Africa. In his interview Mr. Serres described how the AFD, the European Union, and PlaNet Finance had been working together to create a guide for transparency to be used by institutions in the region to promote financial transparency on issues such as interest rates, audits, and ratings designations, as well as how to properly interact with regulators, staff, and other parties. According to Mr. Serres the project was designed above all to help to improve the overall stability of the sector and that the tenets of the document were being further promoted by direct interactions between PlaNet Finance and numerous MFIs.

As corporate governance becomes more of a byword in the industry, and increasingly crucial to both stability and the desire for both social impact and positive returns, it is likely this discussion will become an increasingly conspicuous piece of the microfinance debate. See below for videos of experts at the World Microfinance Forum Geneva discuss these important issues.