Recent upheavals in the global financial sector and emerging signals for more chaotic conditions in the folds of the financial institutions of the economically rich countries, particularly of the US and European countries, are likely to have a global impact.
This necessitates to put into place appropriate corporate governance to ensure that the institution concerned is able to foresee all local and global setbacks and then take measures accordingly, well in time.
For every financial institution in general and micro-finance banks (MFBs) and micro-finance institutions (MFIs) in particular clients, employees, owners, government (in case of public sector organisations), donors and creditors are the main stakeholders' as such, the governing board of directors must have diverse representation to safeguard the interest of all stakeholders. Neglect of this very point has sent quite a number of MFBs and MFIs into the woods particularly in India and other South Asian countries where management/board of directors of affected entities have failed to determine the equilibrium between the loan size, rate of interest to be charged and the lending risk and also extent to which an average borrower's needs are to be met effectively.
In this context, it is noted that low-income developing countries are likely to come across more serious challenges due to continued high food and fuel prices in years to come enhancing the ratio of their impoverished population. This has necessitated developing serious concern on the part of the board of directors for achieving double, the bottom line returns that is financial as well as social well-being targets.
Since the philosophy of micro-finance sector in particular is based on dictum that its performance will be judged mostly on social rather than financial matrix, as such, quite a number of MFIs in South Asian countries failed to achieve the sustainable growth level in a reasonable timeframe and resultantly had to go out of business finally.
In recent years, quite a number of MFIs in Pakistan have been transformed into full-fledged micro-finance banks. For such MFBs, good governance is crucial for their survival. No doubt the guidelines are available for doing business effectively through the relevant banking ordinance and prudential regulations issued by the State Bank of Pakistan and regulatory requirements spelled out by the Securities and Exchange Commission of Pakistan (SECP), yet management and board of directors must strike the balance between the financial and the social objectives, which can be done by taking care of the fact that representation of NGOs on the board who are normally intended to undertake all policy matters with social perspective must not override representation of other stakeholders who desire financial viability and sustainable financial growth of the institution, which according to general business norms, never be compromised.
Similarly MFIs, which are funded by foreign agencies must be give only a reasonable representation to donors as has been experienced world over by micro finance sector particularly in South Asian countries that decisions of board of directors are influenced by the funding agencies' point of views regarding social responsibility having in-built political interest, which in some cases restricted the outreach of MFIs/MFBs concerned.
It is a common phenomenon that where board of directors' composition gives large representation to donor agency then rules and regulations, traditions, culture and ethnic alliances are overlooked in policy decisions. In such situations government, donors and other stake holders mistrust each other. As such it is advisable that for a small donor funded MFI mainly involved in credit disbursement, a small size board working with the policy of "advise and consent" be inducted, whereas large MFIs and MFBs having operations with diverse services and products and having equal concern for financial viability need to have larger Board of directors comprising of people with deeper technical expertise to oversee risk management function and particularly to be watch dog on internal control system of the organisation.
Micro finance being the most effective tool to eradicate poverty must have government backing also. Political environment provides greater opportunity for focusing on poverty reduction program. During early nineties in Costa Rica, in view of government policy to bring marginal groups in political sphere, state provides all support to MFIs/MFBs and all entities involved in poverty reduction program. In Pakistan's scenario, where ruling party and its coalition partners are keen to improve their vote bank, micro-finance institutions both private and government-owned must have a government representative on their board, not only to improve outreach, but also continuous financial support from government in case of need.
Further, it has unanimously agreed by all reactionaries world over in the area of micro-finance that broader board of directors composition enables institution to collect more information, which facilitates effective decision-making and planning for the growth of micro-finance industry.
Since alleviation of poverty is the main issue with micro-finance institutions of all categories, it is essential that research in behavioural aspects of poor communities be conducted on continuous basis, particularly in the context of primary education, healthcare, household savings and borrowings and their urge to set up small/micro businesses. Accordingly, majority of the directors appointed on the board must have inclination towards research work so that they make it mandatory for the organisation to strengthen research work on all issues relating to poor to enable organisation to develop strategies/services and products for the welfare of their clients. It must be made obligatory on the part of board that all research findings are placed on organisation's website.
In majority of the countries, including Pakistan, position of chairman and CEO is held by the same person. Both the positions should be separate to avoid apprehensions regarding 'management capture phenomenon', which usually influence the process of remuneration fixation of senior management and top executives. The remuneration in such cases should be linked to incumbent's performance within its prescribed time horizon of his/her appointment on a coveted position. Similarly in order to ensure effective internal control it should be the prerogative of the Chairman of the Board to set up audit committee with representation of two board members on the committee in addition to management's representatives. This committee needs to submit summary of all audits conducted to board of directors in each board's meeting.
Further, it is incumbent upon board of directors that they take care of the interest of stakeholders not represented on the board. They are depositors and borrowers. Board must ensure that all operations/services/products of the organisation are really benefiting them and at the organisation is able to expand its outreach on continuous basis by applying latest techniques of communication.
In Pakistan, through Micro-finance Banks' Ordinance, it is obligatory on the part of all MFBs that their board of directors explicitly examine 'duty of care' document, which gives statement regarding al operations of banks, strategies adopted for risk management, investments and financial management etc. This document duly signed by all directors is submitted to State Bank of Pakistan. This document should be made mandatory for all MFIs also in order to ensure transparency and purposeful operation of these institutions.
It must be obligatory for corporate governance of each MFI/MFB to ensure capacity building of work force of all cadres through training arrangements on continuous basis to expand their outreach. It is unfortunate that so far only 7.5% of 27 million potential borrowers have been covered through various micro-finance institutions operating in the country.