Microfinance and the Corporate Governance Conundrum

Abstract

Puchniak and Tarcila Reis for comments on a previous version of this Article, and Shruti Iyer for research assistance. I also thank Mukul Asher, Savita Shankar, M.S. Sriram and participants at the 8 th Asian Law Institute (ASLI) conference held at Fukuoka, Japan in May 2011 and the Institute for Global Law and Policy Workshop held at the Harvard Law School, United States in June 2011 for their valuable insights. My appreciation is also owed to several practitioners of microfinance in India who were generous with their time and ideas, but who cannot be named individually due to the understanding of anonymity. Needless to say, the views in this Article as well as any errors or omissions remain mine alone. BBLJ 9.2 ART 2 VAROTTILVAROTTIL 8/21/2013 10:02 AM Microfinance and the Corporate Governance Conundrum case studies and field interviews, it seeks to develop separate parameters for measuring corporate governance and performance of microfinance companies, so that the overarching goals of reducing poverty are not diluted.

Microfinance regulation and effective corporate governance in Nigeria and Zambia

“…Ulrich and Hoback (2014) corporate governance issues which are specific to microfinance institutions and a tailored corporate governance code would be more effective. In fact, arguments have been made that the governance and regulation of MFIs needs to be tailored specifically to the needs and peculiarities of the microfinance sector (Ahmed et al, 2013;Varottil 2013). An example of these peculiarities is highlighted in The Council of Microfinance Equity Funds (2012) Governance Guidelines which provides that Microfinance institutions operate commercially whilst maintaining social aims (the double bottom line), therefore, their boards should play an active role in advancing their social mission and one way of achieving this is to have a committee on the board that oversees this objective.…”

Corporate Governance – Performance Relationship in Microfinance Institutions (MFIs)

“…In the microfinance literature, governance first appeared in 1997 and emphasised the relationships between boards of directors and the management of MFIs (Lapenu & Pierret, 2006). Further, existing literature emphasises the importance of corporate governance for the microfinance sector as it is a significant factor for enhancing the viability of the industry (Hartarska, 2005;Labie, 2001;Mersland, 2011;Mersland & Strøm, 2009;Varottil, 2012). Kirkpatrick and Maimbo (2002, p. 293) point out that "Five years after the notable paper by Berenbach and Churchill (1997) on microfinance regulation and supervision, the appropriate level of government-supplied regulation in the industry remains unclear.…”

“…Besides, general guidelines for corporate governance are not adequate for MFIs as there are cultural and regional differences that require the development of a specific framework for corporate governance (Gant et al, 2002). Varottil (2012) stated that MFIs need a specific corporate governance framework even when they are examined through a theoretical perspective.…”

“…However, the increasing popularity of microfinance as a development and anti-poverty tool has pushed the industry towards financial self-sufficiency and created a tension between the MFI's dual mission of financial self-sufficiency and social orientation (Sinclair, 2012). Furthermore, Varottil (2012) and Sinclair (2012) point out that the commercialisation of MFIs from non-profit institutions to for-profit institutions has created several issues in the industry. Even if the commercialisation of MFIs has assisted in scalability and outreach by broadening the scope of financial support for poor people, it has caused MFIs to turn back their social goals.…”

“…This underlines a need to transform non-profit MFIs to for-profit ownership (Ledgerwood & White, 2006). Prior studies have pointed out that most MFIs are now commercialising their institutions from non-profit to for-profit as shareholder firms can perform better than non-profit organisations (Hardy et al, 2003;Ivatury & Reille, 2004;Ledgerwood & White, 2006) and are a solution to provide low-cost credit to greater outreach (Varottil, 2012).…”