GOVERNANCE

OF
MICROFINANCE INSTITUTIONS

Shalik Ram Sharma

February 2006
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 GOVERNANCE
The fundamental objective of governance is
the “enhancement of the long-term
shareholder value while at the same time
protecting the interests of other stakeholders
such as suppliers, clients, creditors, the
bankers, the employees of the organization,
the government and the society at large”.

Source: Corporate Governance, Mega Ace Analysis, Oct-Dec ‘99

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Governance comprises:

• The Board of Directors, and

• The Management

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 Composition of Board
• Every MFI whether a development bank, a
savings and credit cooperative or a financial
intermediary NGO (FINGO) has a “Board of
Directors”
• Formation of Board and its duties and
responsibilities are laid down in the
Memorandum of Association of the respective
MFI. The board members are elected at the
“Annual General Meeting (AGM)”.

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• The number of board members varies from MFI to MFI.
The number should be (i) between five and seven for
development banks, (ii) as stated in their respective by-
laws for savings and credit cooperatives, and FINGOs.
• The tenure of the board members is at the most five years
for cooperatives and four years for the development
banks.
• The members at the AGM elect the Chairperson of the
Board of a cooperative while the board members from
themselves elect the Chairperson of the board of a
development bank.
• The Chairperson chairs the AGM and also the board
meeting.
• The remuneration of the board members is fixed by
AGM. 5
 Roles and Responsibilities of the Board
• Controls the organization and its management by
formulating code of
conduct/policies/rules/regulations in respect of
financial control, reporting and monitoring system,
management information system, personnel
management, and human resource development.
• Recruits and evaluates the performance of top
management.
• Responsible for preparing annual budget and program
and implementation of the same after it is approved
by AGM.
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• Gets the institution’s annual transaction
audited and presents the Report at the
AGM for approval.
• Calls the AGM and implements its decision.
• Is accountable to the AGM or shareholders
for creating, protecting and enhancing
wealth and resources for the institution,
and reporting to them on the performance
in a timely and transparent manner.

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 What Board Should Not Do?

• It should not get involved in day-to-day

management/operation of the
organization, which is the responsibility
of the management.

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 Management
• The aim of the management is to maximize
shareholder’s value. However, it is accountable
to the board of directors and must operate within
the boundaries and the policy framework set by
the Board. The real burden of governance lies
with the management, which is responsible for
translating the policies and strategies of the
Board into action.
• The management comprises the Chief
Executive Officer/Managing Director/General
Manager and the departmental heads of the
institution involved in day-to-day affairs.
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 Role of Management
• Assisting the board in its decision making process in
respect of the company’s strategy, policies, code of
conduct and performance targets by providing
necessary inputs.
• Implementing the policies and code of conduct of the
board.
• Managing the day-to-day affairs of the company to
best achieve the targets and goals set by the board and
to maximize the shareholder’s value.
• Providing timely, accurate, substantive and material
information, including financial matters and
exceptions to the board of directors, board sub-
committees and the shareholders.
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• Ensuring compliance of all regulations and laws.
• Ensuring timely and efficient service to the
shareholders and to protect shareholder’s rights and
interests.
• Setting up and implementing an effective internal
control system, commensurate with the business
requirements.
• Implementing and comply with the code of ethics as
laid down by the board.
• Cooperating and facilitating efficient working of
board sub-committees.
• Preparing annual report to the shareholders. This
report should include, in addition to director’s report,
the following: 11
• Organization’s structure and developments.
• Opportunities and threats.
• Product-wise performance.
• Outlook.
• Risks and concerns.
• Internal control systems and their adequacy.
• Discussion on financial performance with respect to
operational performance.
• Developments in human resource front, including
number of people employed.
Source: Mega Ace Analysis, Oct-Dec 1999.

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 Indicators of Good Governance
Board Members
• Familiar with the laws, by-laws and the regulations under
which the organization is incorporated.
• Familiar with the institution’s (i) Articles / Memorandum of
Association, and (ii) vision, mission, goals and targets.
• Familiar with the microfinance sector and committed
towards the vision and mission of the institution.
• Well informed about the institution and its financial status.
• Active and regular participants in the board meeting.
• Focuses on strategic rather than operational issues.
• Non-interference attitude towards day-to-day management

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• Willingness to run the institution in a
professional and business like manner.
• Well informed about the customer’s tastes and
the savings and credit products provided by
the organization.
• Willingness to provide services that is suitable
to customer’s need and purchasing power.
• Growth oriented.
• Knowledge of interpreting financial statements
and ratios.
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Management
• Leadership quality
• Innovative
• Ability to mobilize resources.
• Ability to analyze and interpret financial statements
and ratios.
• Practitioner of microfinance services.
• Committed towards achieving organization’s vision,
mission, goals and objectives.
• Result oriented.
• Pleasing Personality.
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• Ability to mobilize subordinates for getting the
job done.
• Well informed about the market and the
competitors
• Ability to maintain working relationship with
government officials, donors and other MFIs.
• Knowledge sharing attitude.
• Ability to have confidence of subordinates,
shareholders and the board members.
• Ability to have AGM within the timeframe set
by the law.
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THANK YOU

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