Effective Governance for Microfinance Institutions
This document examines governance issues in microfinance, with a focus on roles of board members, board composition, and building trust and managing conflicts of interest.
The board is responsible for four specific roles, namely, fiduciary, strategic, supervisory and management development. Its composition should include members with diverse skills to effectively guide senior management. Governance systems should engender trust, which enables the MFI to attract investors and depositors.
Many MFIs are struggling with the governance challenges of becoming for-profit institutions. The motivation of members on NGO boards is very different from that of members on traditional for-profit boards. The document lists the following steps for achievement of effective governance:
- Developing a recruiting kit to assist a board in identifying its role and necessary skills;
- Training board members about the hybrid objectives of microfinance;
- Preparing guidelines about the appropriate role of board members to avoid conflicts of interest;
- Conducting research to suggest ways of aligning incentives and compensation for senior management and board members with the social objective of the institution.
