> Posted by Lizzy Bolze, CFI Analyst, with contributions from Alex Silva, Calmeadow Foundation

Are you a microfinance institution in the Middle East or North Africa (MENA) region? Would you like to improve your bottom-line and attract more investors? Here is one simple trick: improve your governance! A recent International Finance Corporation (IFC) paper focusing on MENA, Corporate Governance Success Stories, concludes that “good corporate governance can help companies improve their [financial] performance and gain access to capital,” and various stakeholders, such as institutes and regulators have been actively promoting strong corporate governance in the MENA region. As a result many MFIs in MENA have experienced an increase in access to finance, higher profitability, a reduction in organizational inefficiencies, and an increase in impact on sustainability, among other important growth factors.

One such MFI is the Pakistan-based NRSP Microfinance Bank, which went through a rigorous transformation in 2007 and set goals to improve corporate governance. NRSP focused on restructuring board and management roles, establishing board committees and governance policies, and developing a risk management framework with internal audit functions. Within two years of implementing these governance changes, NRSP saw a $1.7 million profit in the first year, a credit rating improvement from “stable” to “positive”,  and an increase in board effectiveness with the inclusion of women and independent directors. At the same time its ability to leverage equity increased. Access to finance grew to four times equity.

Another MFI that demonstrates the power of good governance is Kashf. Also based in Pakistan, the institution was set up in 1996 and now ranks among the top 5 percent of MFIs in the world in terms of outreach. Kashf began corporate governance reforms in 2007. Key board committees were established to enhance its board’s independence and effectiveness, and committee structures were changed, which included enlarging the audit committee’s scope. The MFI added a non-executive member with an accounting background to enhance its board’s skill mix. To strengthen its management and control environment, Kashf bolstered its internal audit function, instituted a compliance function that reports directly to the managing director/CEO, and formalized succession planning for key senior management positions. These changes helped strengthen board effectiveness, improving board engagement on strategy setting and oversight capabilities; increase access to additional sources of funding ($25 million in commercial loans and $1 million in grants); improve Kashf’s reputation among and success with the donor community; and finally, staff morale and the company’s corporate culture were positively impacted by the changes.

NRSP and Kashf are just two of 19 companies highlighted in the IFC’s report on corporate governance success stories in MENA. Not only is good governance important to the operational health of MFIs, it is becoming increasingly significant for building reputation, and the trust of investors. The report states, “The 2008 financial crisis escalated the need for change by showing that good governance is no longer an option, but an imperative.”

In a recent study sponsored by SANABEL and IFC, Voices: An Assessment of the Perceived Risk Facing the Microfinance Sector in the Arab World, which monitors the risks faced by the microfinance sector, half of those interviewed perceived corporate governance risk as “high” or “very high”. Financial institutions in all markets are rethinking the importance of improving governance, particularly in MENA where there has been an emphasis on building investor relationships by strengthening company transparency and governance strategy. Understanding how better investor relationships are linked to improvements in corporate governance has increased the demand for knowledge sharing and training in this area.

Yet there is still a significant amount of progress to be made. A study by IFC and Dubai’s Hawkamah Institute of Corporate Governance found that more than half of the companies in MENA don’t fully understand the benefits of corporate governance, but recognize that governance practices need improvement, particularly in areas of board structures and roles, risk management, and audit. Undertaking organizational and board changes is daunting for any institution, but understanding the successes that many MFIs in MENA have experienced from doing so will be a motivator for other institutions to follow suit.

Calmeadow, SANABEL, and the CFI are developing a Fall 2016 seminar for board members and CEOs to improve governance practices through peer-to-peer learning and exchange. Stay tuned for more information.

Have you read?

Governance Challenges in MENA Microfinance Institutions

What Can the Financial Inclusion World Learn from FIFA about Governance?

MIV Governance: The Case of AfriCap