BY ALYSON BALL

Unfortunately, many definitions of MFI (Microfinance Institution) Governance involve "all stakeholders" including: the board, staff, lenders, equity partners, shareholders, clients, elected officials and even regulatory personnel. Defining Governance this broadly begs the question: Who is ultimately responsible for making sure that an MFI is ethically and profitably managed? It is the Board of Directors.

The board provides oversight in these five key areas: (1) financial stability, (2) strategy, (3) organizational policies, (4) CEO management, and (5) board sustainability. The board guides the organization while the CEO and his/her staff ensure that products are well-designed, clients are treated ethically and legally, employees are well-managed, investments are sound, risks are managed, and the organization has a strong foundation on which to grow in a purposeful, strategic direction.

Here are some simple, but powerful, questions that all MFI boards should be asking themselves and their CEOs as they provide guidance and oversight:

1. Are we more interested in the quantity or quality of our loans? How is this illustrated in our managerial policies, procedures, and personnel reward systems?
2. Are we reasonably sure that our loans are invested in businesses that our clients own and manage? What are the benefits of knowing how our loans are used? What are the costs? What are the risks of not thoroughly understanding our client's financial needs?
3. What are we doing to ensure that our clients are not borrowing from multiple lenders? (If we're doing nothing, how could we manage this more effectively? What would this cost?)
4. How do we assess the credit worthiness of individual new and existing clients? What are our procedures for assessing new and existing client risks? What training do we provide our employees to assess the creditworthiness of our clients?
5. What is our organization's public position on the development of a credit bureau? How are we supporting that position?
6. What are our pricing policies? How often does this board review our product line and management practices to ensure that we follow these pricing policies?
7. What client protection policies have we adopted? How do we communicate these policies with our employees and with our clients? How do we make sure that our employees adhere to these standards?
8. How do we assess the risk of our growth? What percent of our future growth will come from (a) increasing loans to existing clients or (b) loans to new clients or (c) new products? How do we compare the risk of these three sources of growth?
9. What financial or other risks are embedded in this business? Should we create policies and develop procedures to manage these risks?
10. What risks (legal, regulatory, and political) are inherent in the microfinance sector of this country? How are we insuring against and managing these risks?

Don't shy away from these difficult and possibly daunting questions.

If you are the CEO of an MFI, work with your staff and board committees to develop a point of view about each topic. Write policies and create procedures to manage these areas of your business. Seek board approval for your conclusions.

If you are on the board of an MFI, forward this article to the CEO and the Chairperson of the Board. Offer to work with the CEO, staff, and appropriate board committees to discuss these topics and develop policies and procedures for the organization. Seek approval from the entire board. By approving organizational policies and procedures, the board takes responsibility for the MFI and governance of the organization is where it needs to be.

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