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> Posted by Andrea Horak, Program Coordinator, 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.

A business can be profitable without strong governance, but can this be sustained? The past has taught us that weak governance practices are often critically detrimental for an institution (see Weathering the Storm and Failures in Microfinance: Lessons Learned). Have businesses and institutions accepted that good governance is positively correlated with profitability? If they haven’t, they should.

The Microfinance Information Exchange (MIX) ran a pilot project in 2011 testing a new set of governance indicators among a sample of 162 MFIs across 57 countries. From the initial findings, the MIX reported that the indicators showed a positive correlation among factors such as the presence of risk management functions, internal auditing, and board committees, suggesting that good governance practices do not exist in isolation.

In “Performance and Corporate Governance in Microfinance Institutions,” Roy Mersland and Reidar Oystein Strom examine the relationship between corporate governance in MFIs and firm performance on social and financial dimensions. In their study, the effects of various board characteristics, ownership types, and the external conditions of competition and regulation on an institution’s client outreach and financial performance are considered. As they analyze each of these relationships, the authors establish that the presence of internal auditors and local directors positively influence the financial performance of MFIs. The MIX data also found a strong correlation between MFIs with executive, risk, and audit committees, and the existence of risk management functions. Of course, as MFIs vary greatly in size, structure, and maturity, it’s also important to recognize that when it comes to governance, one size does not fit all.

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