1. A L E X S I L V A
W A S H I N G T O N D . C . | F E B R U A R Y 1 9 T H , 2 0 1 3
The Importance of Good
Governance

2. Why do microfinance institutions fail?
Loosening of internal controls to facilitate growth
En masse hiring prioritizing quantity over quality
MIS systems insufficient to manage growth
Excess funding
Excessive Growth
Poor or partial application of “typical” microcredit
practices with piece-meal implementation (e.g. loan
placement incentives for loan officers) and without
adaptation to realities of new market.
Lack of method altogether
Entry to an oversaturated market, or market with no
demand for microfinance.
Methodological
Failure/Poor Design
Ambition to reach a new market without
understanding that market.
Often accompanies excessive growth.
Mission Drift

3. Why do institutions fail?
Executive Level – Reap benefits for directors or
family members (loans, service contracts)
Operational Level – Phantom loans, false
information, and collusion among officers and clients
Systemic Fraud
Direct, selective investment in MFIs
Decisions governing microfinance made for political
reasons/not necessarily appropriate for microfinance
Rate distortion & payment morale erosion through
subsidies
Excessive public guarantees lead to poor risk
measurement
Sustainability not always a requirement
Government
Intervention
These failures can be prevented/mitigated
through
GOOD GOVERNANCE

4. What is Governance?
Governance is governance; it is not management
Governance: is the set of
processes, customs, policies, and regulations which
affect the way an organization is
directed, administered and/or controlled.
Board members must see to it that the organization is well-managed
rather than managing it themselves.

5. Basic Responsibilities of Boards
1. Determine mission and purpose
2. Oversee strategic planning
3. Determine the Organization's products, programs and
services
4. Select the Executive Director (ED)
5. Support the ED and review performance
6. Ensure adequate controls
7. Evaluate the Organization’s performance
8. Enhance the Organization’s public image
9. Assess its own performance

6. Governance and Risk
 Risk management = decision-making of balancing risk and reward.
For financial institutions it represents a very clear responsibility to
identify, measure, monitor and control all risks faced in running a
financial intermediary
 Risk decisions rely heavily on knowing when to take the “right risks”
for a business, as defined by the board.
 The risk appetite of an institution is set by the board.
Risk-taking is core to financial intermediation, and the
board of directors of an institution are ultimately
responsible for the risks assumed by that institution.

7. Governance and Risk (cont.)
Boards sure ensure that risk management is not separate
from, but an integral part of an MFI’s activities. All
decisions regarding, for example, which business
opportunities to pursue, which clients to accept, which
products to promote, and, what firm-wide behaviors are
acceptable all tie back to the Board’s view on the
appropriate level of risk to be assumed by the MFI.

8. Governance and Risk (cont.)
 Directors need to be proactive and recognize that Risk Management
is their responsibility and does not fall solely under the purview of
Risk Manager.
 Do not wait for risks to reach a critical stage to become involved.
Regularly meet with the Risk Manager and address all risks, set
appetite, and be informed!
Directors don’t manage the company, but do direct the
company. Asking detailed questions to understand more fully
what’s going on in a company is a requirement to be an
effective director. Directors have no insight about what an
MFI should do until they have significant insight as to what’s
really going on.

9. Governance and Risk (cont.)
 Assume an activist role in all risks but particularly with the often
overlooked risks such as
 Reputational Risk – know the image of the institution and
work to better it or preserve it
 Political/Regulatory Risk – know the regulatory requirements
of institutions and anticipate changes
 External Shock Risk – keep abreast of national, regional, and
global macro-economic issues/movements that could affect
your business
 Take the initiative in educating board and executive management
on Risk literature. Hire consultants to tailor existing risk
practices to MFI needs. Seek out experts in MFI risk
management.
 Ensure good governance practice to facilitate the effectiveness of
the Board.(e.g. conflict of interest resolution, independent
directors, ability to meeting with other execs without CEO, etc)

10. THANK YOU!