Remarks by Ross Croulet

….[This issue is] a very critical one….[O]wnership in microfinance takes on many different forms. We have the savings and credit cooperatives where it's actually the clients that are members that own shares in the cooperative. You have private finance companies that may be owned by one or two individuals that provide loans, like in South Africa, you have a cash loan business for those businesses that are owned by individuals. You may have non-profit associations where…the owner…is not very distinct…. Increasingly, we want our commercial banks to be involved in microfinance operations, and of course, we know fairly well that the commercial banks are usually limited liability companies and corporations that are owned by individuals, maybe group shareholders, as well as maybe wealthy individuals…and would come under the guidelines and governance of …the central bank authorities in the countries in which they operate.

Another category is development banks, public development banks. Of course the African Development Bank is an institution owned by its member countries. There are also National Development Banks that might have shared ownership by the governments. This list is not exhaustive….In terms of the governance issue, how are microfinance institutions actually overseen, run, and…governed as institutions? As with the finance companies, it might be single proprietorships….These are single owners, for the most part, small business owners for microfinance institutions….For the cooperative finance companies and commercial banks, there are governing boards that necessarily represent the owners of those institutions. They may also have members of the board who may not necessarily be owners, but may provide expertise or a perspective on the governance of the institution that would help in guiding and setting the policy and…help management of these institutions…run their institutions as best as possible.

Fiduciaries are also key to assuring that the shareholders…especially savers… are safeguarded, that those who are managing and maybe own the microfinance institution, just don't run off with the money and leave the savers holding the bag, as far as losing their savings. It might be in the form of having trustees on the governing board,…if there's any regulation or legislation concerning microfinance in a particular country, these might be required to be on the governing board with microfinance institutions, as with any other financial intermediary.

…Who's ultimately responsible for the funds that are entrusted to it? Whether it's a donor entrusting funds to it…for credit funds, or it's individual savers that are entrusting their funds to an institution. Whether a single proprietorship, partnership, limited in liability company such as a commercial bank…what is the best form of ownership of organization and…registration for microfinance institution such that it's able to accomplish its mission of being able to deliver quality financial services to as many of the poor as possible? Which of these kinds of ownership and structure should be used? How does ownership transfer and who becomes owners in microfinance institution transformation? When you go from a non-governmental organization…to a commercial bank such as [KREP] Bank in Kenya, for example, who then becomes the owners of the newly formed institution? In a cooperative, it's a fairly clear situation, but from a non-governmental situation, it's not so clear.

….In very small microfinance institutions a governing board may not be necessary. But as it grows and evolves, then the issue of governance becomes more important and a governing board…would be called for. The relationship between boards and managers, I know setting up PADME Benin as we grew and expanded, new board members may not necessarily have the institutional memory [or] appreciate what they…went through with the founding members of the organization of the MFI to…be effective as board members. So there's always an issue of the relationship between governing board members and…the management of an MFI; government and central bank regulatory requirements. Especially as MFI's evolved and especially if they go into a commercial banking status, or more formalized status, usually the governing authorities are the regulatory authorities in central banks, and the ministers of finance require that governing boards be put in place.

Another issue is board membership. How many members should you have? Who should be represented and should it just be the owners, the shareholders? Or should you bring in other members to the board so as to provide their expertise? A big issue too, sometimes…there are conflicts of interest and potential corruption between board members and management of microfinance institutions. Some of the potential solutions? They have clear rules, regulations, and charters for microfinance institutions. Make sure that [it] is very clear when the microfinance institution is established, what are the respective roles and responsibilities of management vis-à-vis a governing board adapting and providing clear laws, regulations, and procedures in a given country for microfinance ownership and governance. Make sure that these are clearly spelled out in the legislation and the regulations in a particular country. And of course, having continuous research on which ownership and governance structures are the most efficient in getting quality financial services to as many of the poor as possible. This is where CGAP will be very helpful….

Read remarks by Rashid Malima