Is your fish rotten from the head? Is the board of your microfinance institution competent, and are you benefiting from the board’s competence?

By May 24, 2023 No Comments


Bob Garratt in the introductory section of his book, ‘The Fish Rots from the Head – The Crisis in Our Boardrooms: Developing the Crucial Skills of the Competent Director”, asked several thought provoking questions. Among others, he asked whether one is happy with what happens around the boardroom table and whether we are truly aware of the potentially huge positive effects truly competent boards can have on private companies and public services? These questions and more are relevant for all boards.

This paper shares thoughts on practices observed from working with several MFI boards and their CEOs. The institutions include rural and community banks; savings and loans companies; microfinance companies; financial NGOs and credit unions. My interest in writing this piece came from a recent conversation with a bank examiner who indicated that “the problems of our financial sector will be minimized if the institutions got governance right”. The concerns suggest that we might be getting a number of things wrong with our corporate governance. My take therefore is that, if an MFI has a competent board, it will be a great asset to the MFI. On the other hand, an incompetent board becomes a liability not only for the MFI, but the wider financial sector. From my observations, boards become incompetent not necessarily because the individual directors are incompetent, they become incompetent because either as individual directors or a board, they do not have the required knowledge, skills and indeed attitude to do their work as boards of microfinance institutions.

It does not take too much experience to notice that as a country, we have not developed a strong culture of effective corporate governance. Both state and private owned businesses are caught up in this situation. For example, I always marvel at how the political establishment for example appoints both board (board members) and the CEO instead of appointing the board and allowing the board to appoint the CEO. In my view, it is not because the appointing authorities do not know that it is wrong, it is because as a people we have failed to follow good corporate governance practices. It is therefore not surprising that our MFIs have governance challenges, additionally the thoughts shared in this paper should not be construed as relevant to only MFIs.

Initial Questions

Do you have the integrity required of an MFI board member? This question does not necessarily suggest that directors of MFIs need to have a different level of integrity than other directors. But it is a relevant question to be considered by current and potential directors. MFIs may fail for various reasons, but one reason is that some individuals who serve as directors are failing the integrity test. These directors have contributed to the demise of their MFIs either knowingly or unknowingly, directly or indirectly and through their actions or inactions. MFI resources have been used for direct and personal benefits, loans have been approved for those who do not qualify and for connected businesses just to mention a few. Many of these actions cannot be explained wholly by lack of knowledge or the inadequacy of knowledge on the part of the MFI board. Some are due to absence of the required integrity for overseeing the affairs of an MFI. A board without integrity is actually “incompetent” and will eventually lead to the demise of the MFI.

Do you believe in MFI board orientation and training? Those who appreciate the importance of the work expected from the MFI board also appreciate the importance of board orientation and board training. A board, irrespective of the experience of its members will be better placed if it goes through an orientation process to collectively understand its unique role. Board training is a continuous process that turns a group of directors with different experiences into a competent working board. MFI boards in particular need to have training in the concept and basics of microfinance to put their work in context; understand the various legal provisions that must be observed by their MFIs; be trained in how to provide strategic direction and guidance to the MFI; trained and coached to understand indicators used for measuring and monitoring the financial and operational performance of the MFIs. A board that does not for example understand the indicators used for assessing MFI performance and the basic terminologies in microfinance business cannot be described as a “competent” board. If you are a director of an MFI, quickly assess your understanding of basic terminologies and measures such as outreach, operational self-sufficiency; financial self-sufficiency; productivity measures; efficiency measures; outstanding portfolio; delinquency; portfolio at risk and arrears rate among others.

Thoughts On Making The MFI Board Competent

Insight as the basis for effectiveness: Boards are known to have the responsibility for directing and not managing or even micromanaging. For an MFI board to undertake the directing role, the board needs to have a good understanding of the concept of microfinance and the regulatory framework within which the microfinance institution operates; understand how a microfinance institution selects its target market and the effect/impact it wants to have on the selected market; understand how a microfinance business develops and assesses the suitability of products for its target market; understand how the microfinance business monitors and controls its operations to achieve set objectives among others. This is what I call insight! Without the required insight, a director of a microfinance business will be found wanting and the MFI itself may be deprived of the potential benefits boards offer businesses. However, with a deep insight, the MFI board will be positioned to provide or review well thought through strategic alternatives and guide the MFI to make choices to achieve its objectives. In offering guidance on the strategic alternatives and choices, the board will be offering what is termed as the “provision of strategic direction”. Strategic direction is needed for decisions relating to new markets, new branches, new products, technological, funding and management changes among others.

Boards have to ensure MFIs comply with all relevant legal provisions: MFIs are registered under business registration laws and they operate as regulated businesses. Boards with insight know the MFIs’ obligations and ensure that the relevant legal provisions are followed through. Boards that pay attention are said to be in compliance with their legal obligations. The board has to ensure that the microfinance business through its senior management staff is in compliance with all legal obligations. Specific legal obligations include meeting the regulator’s directives on minimum capital requirements, achieving capital adequacy ratios and meeting various reserve requirements, operating in conformity with permissible activities and various performance benchmarks among others. Additionally, the board has to ensure compliance with requirements of the registrar of companies such as filing of annual returns and audited accounts; compliance with obligations imposed by other statutory bodies such as revenue and pension authorities. The members of the board do not need to have legal background to ensure these legal obligations are fulfilled by the MFIs. However, where the board is not sure on the status of the MFI with respect to legal obligations, it will be proper to ask for a legal review from a lawyer who understands. Directors may be liable for the non-compliance to legal obligations by their MFIs.

Boards have to ensure resources and liabilities of the MFIs are used appropriately: Technically, we know that board members are placed in their positions by shareholders. But once the board is in place, it has responsibilities that go beyond the interest of owners. In deposit taking institutions for example, the interest of depositors is critical to directors. Directors are in position of trust – a fiduciary – position and are required to demonstrate high level of trust and accountability. Risk assessment and introduction of risk mitigating measures, approval of detailed policies and procedures manuals covering key functional areas and assurance of their relevance and appropriate use in the MFI are some of the tools MFI boards use to ensure their fiduciary roles are undertaken. A board that cannot be trusted to serve the utmost interest of stakeholders cannot be described as a “competent” board.

Competent boards exercise oversight: Boards do not manage and yet are required to know and assure themselves and other stakeholders that the MFI is executing the agreed strategic direction; is in compliance with all legal obligations and is keeping assets and liabilities in a manner that ensures protection of the interest of all stakeholders. Boards exercise oversight in different ways, but the most significant ones include predetermination of benchmarks to guide management and MFI performance; receipt of periodic reports and updates from senior management; and meetings with senior management as a board or through sub committees to require explanations regarding indicators outside the benchmarks. A major responsibility of the MFI board is to determine its own A board information needs for carrying out oversight instead of relying on the management team to determine what the board should know. For example, a board that approves an annual budget will ask for periodic (quarterly) reports on the budget performance with detailed explanations regarding line items outside tolerable limits. The loan portfolio report, financial assets and liabilities maturity analyses reports, summary periodic financial performance and position reports , branch and product performance analyses reports, customer complaints and resolution analyses reports and prudential reports already submitted to the regulator are some of the basic reports that competent boards use for carrying out oversight. The board also relies on the periodic report of the internal auditor to assure itself on the performance of the MFI and compliance with approved policies and procedures. Where the board is unsatisfied they make proposals for specific actions to be undertaken. The board work is involving and directors need to embrace training and skills development. One consideration is coopting non board members who are experts to help the board in its work. The final decision will however come from the MFI board.

Continuous training of and periodic changes in board members: The need for continuous training is important in areas that affect board operations. Boards need to approve budgets for board training and create mechanisms for replacing members as part of board renewal. Boards should build training into board meetings and must adhere to term limits for members to facilitate changes in board composition. Boards must also review their own performance as a board, review the performance of the board chair and each director, if for nothing at all, this will be for continuous improvement and lead to the creation of “competent”MFI boards.

Concluding Thoughts

Do you have a competent board? Well whether competent or incompetent, the relevance of MFI boards to the performance of the MFI cannot be ignored. MFI boards need to go back to the drawing board periodically to learn and formulate strategies that will make board room discussions and decisions beneficial to the MFI. There are MFI owners who do not allow the practice of good corporate governance, yet in these situations, there are board members who remain on the board as if all is well. If you find yourself in such a position kindly resign but before then report the misbehavior to the regulator. I believe that at the end of the day, integrity backed with knowledge will be the key determinants of good corporate governance for MFIs. [SED].