Microfinance in need of better Governance

Microfinance Focus, Oct 13, 2010: Microfinance institutions which are witnessing growth and expansion wave are increasingly realizing the need of stronger management and a professional approach to exercise a better control over their unbridled growth.

According to the Banana Skin Reports which consistently identify greater governance and management difficulties in Asia than in other regions, the global financial crisis, had shown that much managements were unprepared for shocks, had little understanding of “new” risks such as liquidity, and knew little about risk management.

MFIs are learning that there is a need to develop and institutionalise risk management skills. Among the suggestions were the creation of a risk management “framework” for the industry, development of training at both governance and staff levels, emphasis on forward-looking action (rather than simply reaction), elimination of the view that MF is too special to need risk management.

Recent years have revealed significant challenges for those responsible for maintaining the mission, growth and sustainability of Asia’s microfinance institutions.

A key trend in those MFIs that have maintained strong portfolios continued a healthy growth trajectory, limited staff turnover and continued to attract investment is the strength of their overall governance and management. However, experience is uneven across the region.

Discussing the potentially wide ranging implications of governance, during the plenary session at Asia Microfinance Forum 2010, Greg Chen, CGAP, Regional Representative for South Asia, USA said, “Growth and market developments do not necessary bring about increased risk, over indebtedness and other issues. However growth may cause erosion of MFI lending discipline, overstretched MFI systems and control, concentrated market competition and multiple borrowing”.

For microfinance to work better, Mr. Greg emphasized on the need of creating an enabling industry infrastructure. “More work needs to be done to capture geographical data to know where market penetration is happening. Market analysis, lending indicators and credit information are some of the areas which need special focus”, he said.

Mr. Alok Prasad, CEO, Microfinance Institutions Network, India who read few definitions of Corporate Governance to the audience said, “Good governance is nothing but ideal. It is a chimera in real world where you think it is there but when an acid test happens, it comes out to be something different”. “Corporate greed and personal greed do woe the microfinance industry at large” he remarked.

Mr. Alok also identified few key drivers of good governance in an organization saying “Promoters-CEOs, independent directors, investors, regulators and the ambitions of the MFIs play an important role in establishing good governance”.

Responding to a question from the floor about the importance of legal structure in corporate governance, Mr. Alok said “Legal structure does have a significant role in corporate governance and the size of regulators power does have an important affect”.

© 2010, Microfinance News. All rights reserved. 2008-09