Banana Skins 2012: Improving MFI Governance

This year’s Microfinance Banana Skins is aptly titled “Staying Relevant.”  The fourth in the series, each year the Banana Skins report reflects not only the perceptions of industry actors but stands as a commentary on the evolution of the microfinance sector itself.

From the inaugural survey “Risk in a Booming Industry” (2008) to “Confronting Crisis and Change” (2009), and “Losing its Fairy Dust” (2011) to this year’s report, David Lascelles, survey editor, has provided us “a reading of the tea leaves” of how transformations in the industry show up in the way industry players perceive risks. This year’s report shows how much new players and other external forces are disrupting the once-comfortable microfinance community. New players such as mobile network operators and commercial banks are increasingly serving low income clients. MFIs are dealing with the impact of changing and increasing regulation. Lascelles comments that “these results tell us that microfinance will need to adapt to remain relevant in a much more difficult marketplace.” This should give all of us food for thought and inspire us with a sense of urgency.
We must take advantage of these “beacons” or harbingers of change to navigate successfully the industry’s turbulent waters and  thus avoid the “hazards” and use of life rafts described colorfully in the CFI publication on MFIs in crisis “Weathering the Storm.”
Now more than ever, as the industry undergoes this period of rapid change and innovation, MFIs must ensure they have strong boards which can provide the bold strategic leadership and guidance they will require to adapt and stay relevant.   The board’s fundamental role in setting risk strategy is being put to the test in this fast-changing world. It isn’t just a matter of putting in place a risk strategy but reviewing and adjusting that strategy on a regular basis. Author David Lascelles argues in the CFI publication “Microfinance – A Risky Business, A Time for Strong Leadership”, that setting a risk strategy “should be a continuous process: risks never sit still; new ones appear; old ones take new forms; risk appetite can change when markets change.”
Corporate governance risk has ranked consistently amongst the top five perceived risks in past years’ surveys.  This year’s report is no exception: corporate governance risk comes in second after over indebtedness risk. Not surprisingly, investors and regulators view corporate governance to be a higher risk than microfinance managers do which underscores the need for increased stakeholder dialogue on this front.
Why does corporate governance risk remain stubbornly high on the risk radar screen? Contributors to this blog series have discussed governance challenges such as management capture, founder syndrome Who Is In Charge of MFI’s?, resistance to change and entrenched interests Good Governance is a Prerequisite for Good Business.
Governance risk persists because governance is by nature, complex, multi-faceted and most importantly, based on human judgment and behavior.  Improving corporate governance implies changing attitudes and behaviors of a diverse set of people who make up the board of an MFI.  Managing change of any kind is difficult.  Changing the behavior of an MFI board which is often made up of local and international directors from both not-for-profit and corporate sectors is a daunting task.  It also takes a very long time; raising awareness and getting buy-in for why change is needed is a multi-step process.
Another key issue is that it’s not easy to see or measure results. People are motivated to change when there is a direct link to a desired result or avoidance of a negative consequence.  We are just starting to see preliminary results from efforts to measure MFI governance as Micol Pistelli of the MIX described in an earlier blog posting How Do We Improve Microfinance Governance? Start By Measuring It.
What can be done to improve the governance of microfinance institutions?
Measuring governance performance is one way to motivate behavioral change of board directors and will be especially powerful when relevant peer comparison data becomes available.  Other approaches that are currently being used to strengthen MFI boards include in-person and virtual training, tool development and dissemination, and publications like the recently revised Council of Microfinance Equity Funds (CMEF) “Governance Guidelines” and CGAP focus note, “Voting the Double Bottom Line.” At the Center for Financial Inclusion at Accion (CFI), we focus our efforts on fostering peer-to-peer learning and exchange among board directors.  There is no proven formula and indeed, we may find that the most effective approach may be a combination of all of the above.
That’s why the Governance Working Group, which brings together leading experts and initiatives to address the challenge of improving governance in the industry, meets regularly to coordinate the different governance initiatives in microfinance, conduct research to advance the state of knowledge and practices, and engage with different stakeholders to implement and improve practices.
But we need to be patient.  We need to recognize that strengthening governance is part of institution- building that can’t be accomplished overnight or even in a year or two.  Directors who represent international microfinance investment vehicles (MIVs) on MFI boards can play an important role in bringing governance expertise to the table, but ultimately, local board directors must take the lead in ensuring the long-term viability and relevance of their MFIs.  They are the directors who will remain on the board after the investment funds exit.   Strong local ownership and governance of MFIs are the keys to achieving responsible and sustainable financial inclusion.

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