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Corporate Governance for

Microfinance

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Why Corporate Governance? 1

Separation between ownership and management

The principal-agent problem information asymmetry incomplete contracts moral hazard

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Why Corporate Governance? 2

The Board minimizes Agency risks

A system for the direction and control

For shareholders and non-shareholders (depositors, etc.)

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Two models of Governance Shareholder Centric Stakeholder Centric

Short and long term value creation for shareholders

Hard-nosed commercial profitability

Single tiered board (no separate supervisory board)

Value maximization for a broader set of stakeholders

The organization is seen to have a public responsibility

Emphasis on long term growth

Two-tiered board (separation of the executive board and supervisory board

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Two models of Governance

A MFB board must be a stakeholder board because MFBs are managing public funds and are there to serve the poor and those who have been excluded from financial services.

There is no other justification for a enabling a bank to be established with a very low capital requirement apart from banking on proximity and local knowledge that bridges the information between the bank and its customers.

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Roles and responsibilities of the Board for good governance Vision, Mission and Values

Strategy with quantified objectives

Hire top management and evaluate performance

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Roles and responsibilities of the Board for good governance Monitor risk management and internal controls

Promote awareness of the mission and values

Establish a two tiered board with gender sensitive structures

Disclosure to shareholders and stakeholders

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Roles and responsibilities of the Board for good governance Ensure accurate financial reporting

Undertake an annual review of mission, strategy, risks, SPM (single report format)

Insist on the double bottom line with SPM

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Appropriate relationship between the board and management?

The function of the board is leadership AND oversight- but not

micromanagement.

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What are the major governance problem areas in Nigerian MFBs? 1

Loans to insiders and related parties Nontransparent hiring practices President keeping the cheque book Political party influence

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What are the major governance problem areas in Nigerian MFBs? 2

Manipulated reporting

Concentrated ownership structure - one owner bank with and no stakeholder representation

Infrequent board Meetings

Absence of Social Performance Monitoring

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What is the cost of good governance?

Monitoring costs

Training costs

Enforcement costs

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What are the benefits of good governance?

Good reputation (client retention and increase)

Fairness in lending practices

Transparency in reporting financial results

Asset protection

Value creation for shareholders and

stakeholders