A L E X S I L V A

W A S H I N G T O N D . C . | F E B R U A R Y 1 9 T H , 2 0 1 3

The Importance of Good Governance

Why do microfinance institutions fail?

Loosening of internal controls to facilitate growthEn masse hiring prioritizing quantity over qualityMIS systems insufficient to manage growthExcess funding

Excessive Growth

Poor or partial application of “typical” microcreditpractices with piece-meal implementation (e.g. loanplacement incentives for loan officers) and without adaptation to realities of new market.Lack of method altogetherEntry to an oversaturated market, or market with no demand for microfinance.

Methodological Failure/Poor Design

Ambition to reach a new market without understanding that market.Often accompanies excessive growth.

Mission Drift

Why do institutions fail?

Executive Level – Reap benefits for directors or family members (loans, service contracts)Operational Level – Phantom loans, false information, and collusion among officers and clients

Systemic Fraud

Direct, selective investment in MFIsDecisions governing microfinance made for political reasons/not necessarily appropriate for microfinanceRate distortion & payment morale erosion through subsidiesExcessive public guarantees lead to poor risk measurement Sustainability not always a requirement

Government Intervention

These failures can be prevented/mitigated through

GOOD GOVERNANCE

What is Governance?

Governance is governance; it is not management

Governance: is the set ofprocesses, customs, policies, and regulations whichaffect the way an organization isdirected, administered and/or controlled.

Board members must see to it that the organization is well-managed

rather than managing it themselves.

Basic Responsibilities of Boards

1. Determine mission and purpose

2. Oversee strategic planning

3. Determine the Organization's products, programs and services

4. Select the Executive Director (ED)

5. Support the ED and review performance

6. Ensure adequate controls

7. Evaluate the Organization’s performance

8. Enhance the Organization’s public image

9. Assess its own performance

Governance and Risk

Risk management = decision-making of balancing risk and reward. For financial institutions it represents a very clear responsibility to identify, measure, monitor and control all risks faced in running a financial intermediary

Risk decisions rely heavily on knowing when to take the “right risks” for a business, as defined by the board.

The risk appetite of an institution is set by the board.

Risk-taking is core to financial intermediation, and the board of directors of an institution are ultimately responsible for the risks assumed by that institution.

Governance and Risk (cont.)

Boards sure ensure that risk management is not separate from, but an integral part of an MFI’s activities. All decisions regarding, for example, which business opportunities to pursue, which clients to accept, which products to promote, and, what firm-wide behaviors are acceptable all tie back to the Board’s view on the appropriate level of risk to be assumed by the MFI.

Governance and Risk (cont.)

Directors need to be proactive and recognize that Risk Management is their responsibility and does not fall solely under the purview of Risk Manager.

Do not wait for risks to reach a critical stage to become involved. Regularly meet with the Risk Manager and address all risks, set appetite, and be informed!

Directors don’t manage the company, but do direct the company. Asking detailed questions to understand more fully what’s going on in a company is a requirement to be an effective director. Directors have no insight about what an MFI should do until they have significant insight as to what’s really going on.

Governance and Risk (cont.)

Assume an activist role in all risks but particularly with the often overlooked risks such as

Reputational Risk – know the image of the institution and work to better it or preserve it

Political/Regulatory Risk – know the regulatory requirements of institutions and anticipate changes

External Shock Risk – keep abreast of national, regional, and global macro-economic issues/movements that could affect your business

Take the initiative in educating board and executive management on Risk literature. Hire consultants to tailor existing risk practices to MFI needs. Seek out experts in MFI risk management.

Ensure good governance practice to facilitate the effectiveness of the Board.(e.g. conflict of interest resolution, independent directors, ability to meeting with other execs without CEO, etc)

THANK YOU!