Cooperation with Banks and Corporate Governance: Key Lessons for the Development of MFIs

1. European Microfinance Network Brussels, December 17th, 2013 Cooperation with Banks and Corporate Governance: Key Lessons for the Development of MFIs Marc LabieMarc.Labie@umons.ac.be CERMi - Centre for EuropeanResearch in Microfinance(UMONS - ULB) – www.cermi.eu

2. CorporateGovernance: a major issue in (micro)finance • Banana Skin Reports (2008: 2nd (on 29); 2009: 7th (on 25); 2011: 4th (on 24); 2012: 2th (on 20)) • Some major crisis (at the institution and at the country level) • → EIB project “Microfinance in crisis” • So, controlling microfinance growth and development properly is perceived as crucial but, often, not much effort is really made. Why ? • Because there is always a trade-off between short-term/long-term investments (governance is a long-term investment for which returns are not easily visible – governance is only seen as a major topic when there is a crisis – and then it is often (too?) late). • Because it puts constraints on top management. • Because it is not well understood and it is a complex “systemic issue” (and we have a hard time thinking in a “systemic way”).

3. Understanding microfinance corporate governance:first, a definition… • “Corporate governance is a system, or a setof mechanisms, by which an organization is directed and controlled in order to reachits mission and objectives.” • (Labie & Mersland, 2011)

4. Labie & Mersland, 2011 (based on Charreaux 1997)[The Handbook of Microfinance]

5. The “easy” move:strengthening the intentional specific mechanisms? • Intentional specific mechanisms only depend on the “will” of the institution, but it does not necessarily mean that they are easy to improve: why ? The case of boards. • Mainly because of … • Frequent lack of debate and follow-up on issues such as the mission of the organization and the choices it makes; • Misunderstanding by board members and management of the functions of the board and how to assume them properly; • Constitution of boards and nature of the commitment of board members; • Weak evaluation of most boards (when in place).

6. So, what could be discussed? Board objectives (1) • Board objectives: • Respect legal obligations • Establish strategy with management • Fiduciary Responsibility • Supervision and control • Auto-evaluation • External relationships

7. So, what could be discussed? Board management (2) • What to look for when dealing with board issues : • Adequate staffing (internal, affiliated, external) • Technical skills and mission acceptance • Dialogue between the board and managers • Objective recruitment and rotations (within the board itself) • Separation of the CEO and chairman functions • Establishment and good functioning of specialized committees • Clear information from the internal audit directly to the board • Clear identification of potential conflicts of interest

8. Thank you for your attention. Marc LabieMarc.Labie@umons.ac.be CERMi - Centre for EuropeanResearch in Microfinance(UMONS - ULB) – www.cermi.eu