Same Game, Different League?
This paper presents lessons that have emerged from the banking sector’s corporate governance debate and points out parallels and differences with the microfinance industry.
The microfinance landscape is changing rapidly. Portfolio growth, product diversification and institutional transformation are increasing the sector’s complexity and risks. MFIs must adapt their governance structures to manage these risks effectively.
The paper defines corporate governance and explains its importance for banks and MFIs. It focuses on important areas of the banking sector corporate governance debate, such as board of directors, role of institutional shareholders, governance of risk and executive remuneration. The paper states that:
- Board of directors forms a key governance organ within an institution;
- Institutional investors place their assets in MFIs through microfinance investment vehicles (MIVs);
- MIVs assess the MFI’s corporate governance during due diligence;
- Risk governance is a key challenge to the MFI sector;
- Executive remuneration is a sensitive topic in microfinance, and MFIs that don’t get it right suffer from reputational risk;
- Other areas of corporate governance that are important to consider include transparency and disclosure, role of external service providers and group structures.