> Posted by Danielle Donza
The stories of crises and failures in microfinance often seem to involve the same underlying problem: weak governance.
“Weathering the Storm: Lessons in Microfinance Crisis Survival from Those Who Have Been There” found that “good governance is the ultimate backstop for crisis prevention and management,” and the recent “Failures in Microfinance: Lessons Learned” concluded that, “the clearest and strongest conclusion derived from this study is that an institution’s governance structure proved to be the primary differentiating factor between those entities that overcame a crisis and those that did not.”
In the “Weathering the Storm” case study of “FuegoNord,” an MFI in Lagos, Nigeria closed in 2010 partly because it tied up large amounts of capital in illiquid assets. Yet the management of the MFI invested a large chunk of newly raised equity in three expensive branch buildings without getting the board’s approval.
The case of “MFI 7” from the Latin America study cites many causes of failure but “mainly a lack of proper governance evidenced by the concentration of power in the person acting simultaneously as the CEO, the Board Chairman and its main shareholder.”
Similarly, “Loki,” an MFI operating in a country with a culture of corruption, faced near failure after uncovering a massive Madoff-esque system of fraud. However, the board took a very hands-off approach, allowing a locally hired CEO to hire friends and family and operate with a poor MIS system and weak internal audits. According to the study’s author, Daniel Rozas, a different board “might have also chosen to appoint an expatriate individual as CEO or other senior officer, strengthen internal audit, provide anonymous channels for whistleblowers, institute stricter hiring policies to prevent nepotism, and taken any number of other steps that were absent in the case of Loki.”
In an industry that tends to be painted with a broad stroke, when a few MFIs get into trouble, it affects us all. The fact that governance is repeatedly highlighted in the “Microfinance Banana Skins” survey reports as a key and growing industry risk demonstrates awareness of the problem among industry participants.
In responsAbility’s recent “Microfinance Market Outlook 2012” survey, industry experts were asked to identify the most pressing business needs of MFIs in 2012, and “improving corporate governance” was listed first, followed by “increasing risk management capabilities.”
Regardless of your specific microfinance focus, better governance will likely play an important role in preventing the kind of reputational harm that would have dire consequences for the future of microfinance industry.
Image credit: Wars
Have you read?
Governing Banks, Governing MFIs
How Good is Your Governance?
‘Weathering the Storm’ and Learning from Latin America’s Experiences