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Theme - Issues and Challenges in Governance of microFinance Institutions (mFIs): Indian Experience

MFI Governance - at the Point of Inflexion

Aparna Vishwanatham & Himani Gupta

ABSTRACT: In this article, governance has been defined as the Board and

executive processes and systems that enable the institution to identify the risks

affecting its performance and to manage them to achieve the promised returns

to its various stakeholders. Within this risk-return construct, governance is of equal

importance to all microfinance institutions, whatever be their legal form or mission

and vision. However, some of the processes and systems around governance

would change with the evolution of the institution from start-up to mature. The

nature of the relationship between the executive and the board is critical to

ensuring development of governance processes with the growth of the

organization.

objectives of the MFI, Governance is a

Governance has been defined in

critical requirement and this can be best

numerous ways. In very simple terms,

appreciated when viewed in the risk

governance has been described as a

return construct of governance. It can be

system of checks and balances whereby

safely understood that each MFI has a

a Board is established to manage the

mix of social and economic returns

managers of an institution1. The Board of

objectives ­ arithmetically, the weights

Directors, through the management,

assigned to each may differ, depending

guides the institution in the fulfillment of

on the mission or vision of the

its mission and protects its assets over a

organization. Governance then, is about

period  of  time.  Governance  is

conceptualized as a virtuous circle that

links the shareholder to the Board, to the

clearly defining the returns

●

management, to the staff, to the

objectives in the mission, vision

customer and to the community at

and business plans

large2. A relatively less common view of

governance is in the framework of risk

clearly determining the decision

●

The Handbook

and return ­ governance is effectively

making responsibilities to identify

defined as the Board and executive

lays out the

risks, increasing transparency

processes and systems that enable the

following as the

among  stakeholders  and

institution to identify the risks affecting its

working towards achieving the

key risks faced by

performance, and to manage them to

returns objectives

an MFI

achieve the promised returns to its various

stakeholders.

Working within this construct, it would thus

appear that achieving a social objective

Risk  Return

Framework

for

MFI

and implementing best governance

Governance

practices are not mutually exclusive, and

indeed MFIs of all constitutions should aim

The microfinance sector has evidenced

towards good governance.

considerable argument and discussion

on the social and economic objectives

As the Handbook3 for Governance of MFIs

of its business, and a related question has

states "setting up mechanisms that make

been whether Governance holds much

it possible to manage risks is (thus) directly

relevance to meeting the social

related to how governance works". The

objectives.  No  matter  what  the

Handbook lays out the following as the

key risks faced by an MFI.

1

Effective Governance for Microfinance Institutions, CGAP, 1997

2

Principles and Practices of Microfinance Governance, Accion International, 1998

3

CERISE ­ IRAM, August 2005