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> Posted by Center Staff
The microfinance industry in sub-Saharan Africa, boasting roughly 6.6 million clients, is growing fast. This expansion of financial services to the base of the pyramid, bolstered by an increasingly diverse array of providers and products, is enabling many lower-income individuals, entrepreneurs, and households to access and use essential tools like loans and savings accounts for the first time. To ensure the stability and success of the institutions that provide services, however, strong institutional governance and risk management needs to be a core priority. A new CFI initiative, generously supported by The MasterCard Foundation, sets out to address this.
> Posted by Danielle Piskadlo, Manager, Investing in Inclusive Finance, CFI
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Last year, before I was a parent, my colleague Deborah Drake wrote a blog post asking “What do Governance and Parenting Have in Common?” Now that I am a parent, I would like to draw another commonality between governance and parenting: both are easier said than done!
There is plenty of literature out there on the best practices of parenting but in reality, it is really hard work, full of uncertain information and mixed advice. You may know the importance of letting them cry it out, feeding veggies, limiting screen time, or talking to your kids about risky behavior. However, we also know how hard these things can be to do in practice, and how often they get avoided, explained away, or ignored. It is often hard as a parent to take a long-term view or to experience the short-term pain needed for long-term gain. You just have to pick your battles, hope for the best outcome, and know there will be unforeseen challenges and crises along the way.
Same goes for governance. It is tricky to bring up the difficult conversations at board meetings, hard to think strategically about the long-term when you are busy putting out today’s fires. It is challenging to adhere to all the recognized best practices, and often difficult even to decipher which practices are important to adhere to.
In both parenting and governing, it is helpful to have advice and benchmarks to sort through all the noise. Googling teething or breastfeeding may provide some help, as will reading up on risk management or strategic alignment. But too often, these searches will leave you wondering where you actually stand between “nothing to worry about” and “oh boy, do we have a problem.” This is because these topics are harder to learn from literature and easier to learn from people who have been there.
> Posted by Danielle Piskadlo, Manager, Investing in Inclusive Finance, CFI
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I have written in the past about some of the advantages of having women on boards, including research correlating women on boards with better bottom lines. I recently came across a fantastic piece published by the IFC, Women on Boards: A Conversation with (Male) Directors, which does a wonderful job of explaining more precisely how women add value to boards. Here are a few quotes from the male directors that contributed their thoughts to the publication.
- “When women are at the table, there is less joking around and more objective discussion. I’ve also found that women tend to be more sensible and more thoughtful. I think they care much more about how decisions made in the boardroom will impact people.”
- “Diversity brings more energy to the boardroom.”
- “Women provide good balance. The dynamics change because women are more willing to give the other side a chance than men.”
- “Women are more strategy oriented. They tend to look at where the company is heading, whether things are on the right track, and why the company might be diverging from its strategic goals.”
- “Women are more likely to be conservative and more attuned to good risk management. I don’t think they are more risk adverse but they have more of a long-term and sustainable approach to issues and less short-termism.”
So, how do we get more women on boards? All hands on deck.
> Posted by Joseph Smolen, Summer Associate, CFI
Are MFIs evolving enough to maintain relevance as a driving force in the sub-Saharan African (SSA) economy?
A recent survey of board members of microfinance institutions (MFIs) in SSA revealed two shortcomings at the governance level: 1) MFIs boards and leadership are not effectively incorporating new technologies and 2) there is a systemic lack of awareness related to market forces and competition. Taken together, these two areas of deficient governance suggest MFIs are not evolving quickly enough, and definitely not at the rapid pace of economic growth in SSA.
Which leads us to ask: are MFIs at risk due to their slowly evolving, and sometimes insular, business practices? The answer to this question is an emphatic no….for now. MFIs have been and will continue to be a key driver of economic growth, poverty alleviation, and financial inclusion in the region. However, sub-Saharan Africa is experiencing unprecedented growth, catalyzed by a variety of macro-level influences. This new dynamism in SSA (the second fastest region-wide growth, behind only developing Asia) brings with it faster change than previously seen in the SSA economy. What does this mean for microfinance? Simply that evolution has now become more critical than ever.
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The economic changes in SSA bring with it myriad opportunities – both for domestic residents and foreign investors. Most striking is the increasing eagerness for foreign direct investments (FDI) in SSA. Currently, FDI has taken the form of large-scale investment in established institutional players with little effect on the lower income customer base of MFIs. As capital flows continue to seek opportunities, this could easily change, and other players could contest the space MFIs have historically occupied in the marketplace. While financial services to previously excluded individuals does not necessarily have to be provided by MFIs, there are significant risks that the microfinance space will be impinged upon by mainstream market players such as commercial or mobile banks as well as non-mission driven debt funds. The consequences of such changes include:
> Posted by Joshua Goldstein, Principal Director for Economic Citizenship & Disability Inclusion, CFI
The extent of the reciprocal relationship of trust between an employer and employee may be hard to measure, but it may be more indispensable to good governance than a variety of risk management tools. In fact, there are organizations that forego some traditional risk management mechanisms, instead emphasizing the power of trust. One example, according to Andrew Ross Sorkin, writing in DealBook, is Berkshire Hathaway, the American multinational conglomerate that’s currently the fifth-largest company in the United States.
The normative route to good governance encompasses a host of practices including risk management functions, internal auditing, and board committees. A MIX project examining the practices of over 150 MFIs across 57 countries found a positive correlation among institutional governance indicators, suggesting that good governance practices don’t exist in isolation. Putting such watch-dog measures into place, however costly, is increasingly standard practice at institutions both public and private around the world. Without these, who knows what some employees might be tempted to do. It is the price of doing business. Or at least that is the common school of thought.
> Posted by Danielle Piskadlo, Manager, Investing in Inclusive Finance, CFI
The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.
I was recently invited to join the board of my son’s school. The gist of this invitation email was that there would be a fairly significant time commitment in the form of regular board meetings and committee work, and that in addition to this time investment, “As with all non-profit boards, it is expected that every member of the board will support fundraising, and give a donation themselves.”
I spend much of my time at work on governance topics and am therefore fairly well-versed in the trials and tribulations faced by boards. However, when I personally received an invitation, I felt, in my humble opinion, that this is an absurd request.
What kind of proposition is it to be asked to sacrifice your highly coveted personal time and in return to also be expected to commit your hard-earned money. Could you ever imagine a job where you were asked to pay your employer for the privilege of committing your time and energy to working with them?
That said, there are millions of non-profits in the world and most of them have some sort of governance structure so obviously people do commit their time, energy, and money to non-profit board service. This disconnect got me thinking about why anyone would ever join a non-profit board. What are the incentives? Here are some of the reasons I came up with for why I would consider accepting an invitation to be a board member at a non-profit:
- I felt very passionately about the cause.
- A close friend or relative asked me.
- I had a vested interest in the work of the organization.
- I was flattered to be asked to provide my wisdom/guidance.
- There was some prestige, resume building, or additional perks.
- It would be a good opportunity for networking or may lead to a future job.
- To meet some like-minded people.
> Posted by Bob Bragar, Principal, Strategies for Impact Investors
The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.
The following is the second of two posts in which Bob Bragar discusses some of the unique governance challenges faced by microfinance institutions, as explored through a governance workshop that Bob chaired at European Microfinance Week in November 2013. In this post, workshop panelists Matthias Adler, Principal Economist, KfW and N. Srinivasan, an independent director at Equitas Bank in India, discuss the importance of their positions for effective microfinance governance. To access the first post, click here.
Institutional microfinance investors have a special role to play in maintaining good governance in an MFI, and this can take unexpected turns.
Matthias Adler from KfW spoke about the special concerns that his institution has. KfW is a major German public sector investor that is required by law to have board representation in the institutions in which it invests. As a result, KfW has developed special practices to strengthen the quality of their widespread board participation.
In particular, KfW has developed rules to create strict “Chinese walls” (information barriers) between their board members and the investment staff at KfW. Why? Because they are very aware of the potential for conflicts of interests between a board member’s duty to look (only and foremost) after the interests of the MFI, and the interests of individual investors. They make sure that a KfW board member will not return to headquarters and report on an MFI board meeting to his colleagues. In KfW’s view, this practice increases transparency and reduces the potential for distrust on the part of the MFI’s management. Management may need to obtain guidance from its board without always speaking directly to the investors. And if management is less forthcoming, the board cannot do its job.
While this concern is not exclusive to MFI investors, in the small world of microfinance, with its limited number of players, the concerns are all the greater.
KfW, as a leading microfinance investor, also wants to ensure that boards of directors have all of the skills they need. So KfW helps boards with needed training.
In the final presentation, N. Srinivasan, an independent board member of Equitas Bank in India, spoke persuasively about the value of truly independent directors who balance the needs of all MFI stakeholders.
> Posted by Bob Bragar, Principal, Strategies for Impact Investors
The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.
The following is the first of two posts in which Bob Bragar discusses some of the unique governance challenges faced by microfinance institutions. The posts examine governance through the guidance of three experienced board members. This post shares the experience of Tamar Lebanidze as Constanta Foundation, an NGO she founded, underwent the change to become Constanta Bank, a regulated bank. To access the second post, click here.
“I don’t see why we have to reinvent the wheel. Good governance practices for microfinance institutions are just the same as for any other business. Why should we spend so much time talking about ‘MFI governance’ when there is so much information already available about good governance?”
This question was raised during a recent meeting of the Center for Financial Inclusion’s Governance Working Group, of which I am a member. The question really surprised me. I had always assumed that governance for microfinance institutions was special. It is not exactly the same as good governance practices in other businesses because microfinance is not the same as other businesses. Even so, it’s a good question. It got me thinking.
Of course, many good governance practices are the same from sector to sector. Running an enterprise well involves challenges that are not specific to the product or service the enterprise produces. Any institution can suffer if the board functions badly, risks are not managed, or management lacks transparency. And there is a lot of good work that is already out there on the role of key stakeholders to maintain good governance in financial services and other industries.
So why do we bother to re-think these issues for microfinance? Because microfinance is a more complex business than most. Going beyond just earning profits, the double or triple bottom line that we ask MFIs to achieve makes success, and therefore governance, very complex. Moreover, microfinance’s particular history of migration from NGOs to semi-regulated financial institutions to formal banks adds challenges to achieving good governance. The stew thickens when we bring multicultural perspectives to MFI boards through the presence of international investors from various countries.
> Posted by Madeleine Dy, Program Specialist, CFI
The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.
Making the case for more attention to risk management and governance in both the financial inclusion sector and corporate world can be an uphill battle, but McKinsey’s Global Survey findings provide some strong reinforcement. If we let the numbers speak for themselves, they tell an interesting story. Their survey of 772 corporate directors showed that although over 90 percent of respondents reported that their boards have become more effective over the past five years, risk management still surfaces as the biggest difficulty faced by boards.
The survey shows that board directors have improved their knowledge on various company issues since the last survey conducted in 2011. More specifically, about one-third say they have a complete understanding of their organization’s current strategy, as compared to about 20 percent in 2011. However, only 15 percent can say the same for the risks their company faces. In fact, the reality is that 30 percent of directors reported they have limited to no understanding of the risks facing their company.
You might ask why there is such a difference. The answer lies in the time directors spend on the two topics. Directors responded that they spend more time on strategy than any other area, 28 percent compared to only 12 percent for risk management. This clearly shows where their priorities and attention are focused. McKinsey mentions that companies and boards are becoming more complacent about risks as the 2008 financial crisis becomes a more distant memory — unfortunately fading memories do not translate to fading risks. Read the rest of this entry »
> Posted by Danielle Piskadlo, Senior Program Specialist, CFI
The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.
Governance challenges vary greatly between institutions and regions, and that is why there is such a great opportunity for boards and MFIs to learn from each other by sharing their personal experiences.
Earlier this month the CFI’s Investing in Inclusive Finance program, along with Calmeadow and Boulder Institute of Microfinance, hosted a governance seminar in Mexico called Governance Leadership in a Competitive World. The seminar was structured as a peer-to-peer learning opportunity to engage board members and CEOs in an active dialogue. Participants discussed the challenges they face in governance and risk, and their roles and responsibilities in setting and monitoring the MFI’s mission and strategy. The cases, tools, and materials presented at this seminar created an opportunity for board members to share their experiences and to learn governance best practices from each other. While there are many complexities and nuances to governance, below are 12 practices we hope will be implemented from our governance seminar.
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