Remarks by Rashid Malima

….Ownership may take a variety of forms….The first is the setup, the way the institution or microfinance initiative is started up. Is it started as a project or is it started as a business?….Does it start as a government or private microfinance institution? Depending on how it is started out…it will define the kind of ownership that would be obtainable in the institution. Then there's also the legal framework. Some countries don't have any legal framework which governs the setting up of microfinance institutions, the registration of an institution, [or] what the requirements and options are.

…To our minds when we talk of ownership, what comes to our mind is…the material ownership, that I put in my money, therefore I own that business. But I think we represent microfinance institutions where some of us own those institutions, but we haven't put in any money. So the ownership there is intrinsic. It's the ownership of the idea, which gives one the claim of the origination of an idea in that business or venture. That establishes a formal ownership. But also within the microfinance industry, we recognize ownership of material value. And this is actually the claim on the sponsorship of an idea, which is typical in donor intervention with donors coming to sponsor an idea. But also the claim on the financial value of the business where we have investors, real investors, who have also put in their money in the microfinance institution.

Now, the different people that I mentioned… also have different interests. The founders, for example, with that intrinsic ownership, tend to have a long-term interest attachment to the social goal of the institution. Then you have the donor who is interested in short term, normally attached to the funding period. Beyond the funding period, then the ownership…flows away…or is there, but is not visible. Then you have the investors who may have either long-term or short-term interests, but with the primary expectations of the financial returns and secondary expectations of the social goals. We are talking particularly about the socially responsible investors.

I would like to share with you our experience in East Africa because of this diversity of structures. What do we…see in East Africa, the region that I represent? We have community-based MFIs and typically these are self-help groups and the ownership part here is collective and it is also intrinsic because…the main investment is the idea and you find in most cases, money comes from outside. Then we have the cooperatives, which have distinct ownership which is defined by the cooperative laws, the cooperative act. We have the NGOs that dominate the industry there, and can take different forms, either associations, trustees, or guarantee institutions. Legally, the ownership here is intrinsic and normally, it's the founder who claims to own the idea and thus, the institution. But this claim also conflicts with the legal settings because as NGOs they're not supposed to be owned, but we see in the practice they're actually owned by the founders. And then we have…the commercial companies, these are banks and other institutions, which are registered as companies. And the ownership here is equity based.

Now, regardless of the diversity of the structures…the ownership structures that we see have some points of common interest. In all MFIs…the common interests by the owners are for growth and the growth of the MFI in terms of outreach and in terms of assets. And then there's also the common interest to be licensed so that they can be allowed to take deposits. And then there's also the common interest to access capital from financial markets, to attain sustainability and also, although not always explicit, the protection of the industry.

Now, in order to assure or manage this…common interest…, it moves us to governance, which I simply define as the process to facilitate the separation of ownership from control. Now, whether this is the objective or this is the derived objective, it is a very important point. So, specifically the classical definition…I've also put it there, is a process by which an appointed supervisory body through management guides an institution in the fulfillment of the corporate mission and protects the institution's assets….So it's an intermediate process. You have the owners and then you have…an intermediate body that is created either by the owners or by the legal structures, the legal setting that exists in a jurisdiction, whose aim is to actually ensure that the owners' interests are ultimately realized.

Governance actually seeks to enhance accountability, efficiency and sustainability, integrity and transparency. It seeks to enhance recognition and protection of stakeholder rights and interests. It also seeks to legitimize representation and participation. The owners come in many different forms. We have institutions…like Grameen, for example, where the clients are also shareholders. So the governance…the bringing of those clients or their representation to the board actually legitimizes their participation in the institution.

With governance we see a diversity similar to the diversity we have noted in ownership…it can take different forms…As an example here, I…use.…what we see in East Africa. We have community-based institutions with governance bodies that are either steering committees, or executive committees, which are elected and supervised by the members. The problem here is these committees also double as management. So, you see a governance structure where the supervisory body that has been created also doubles as management. Then you have the cooperatives, which have distinct governance structures put in place by the corporate body. They have executive committees although also their managing structures are there, but are rather hazy.

We have the NGOs …where you see the board of directors, board of trustees, or executive committees. They are normally supervised by the founders. They have distinct management structures but have limited legislative compliancy. . Then you have the commercial institution, which is a typical case of very clear governance. We have boards of directors appointed by the members, the owners, people who've put in their investment. They supervise the members and the owners. They have distinct management structure and in most cases there is a legislative compliancy demanded by the laws under which they are registered.

As to how [an] institution gets started, some of them start too small to even think of building the necessary governance structures. So as the institutions develop, we should allow the governance structures to also evolve, the mission must remain focused but keep on being refined…

This brings us to the issue of effective governance. A stage where one can say that…there is effective governance is where you see a clear separation between the roles of the board and the management that it's supposed to supervise. Here is a classical list of the pillars of governance: transparency, accountability, efficiency. I would like to also look at the impediments. As we see, there is a list of impediments here: lack of clear legal form, strong founder involvement, lack of financial stake, strong orientation towards the social interests, the limited stakeholder representation and difficulty in aligning the individual interests of the directors to the institutional interests. Then there's [also] the lack of legal enforcement impediment.

Read remarks by Beatrice Sabana