Remarks by Beatrice Sabana

In my country, [Kenya], most of the microfinance institutions are NGOs, so there is really no legal requirement that governs ownership…and governance. So many of the NGOs take advantage of this fact and put up governance structures that are not transparent.

We talk about the founder-member syndrome….We have what we call, My Own NGO, where, you know, it is mine, I own it. I'm the custodian of the vision. Nobody else shares my vision, and the board has to listen to me. I'm the founder. And we have had good institutions that [have] stuck it out with very noble objectives, [and they've been] driven to the ground because of this founder-member syndrome, and we need to talk about it. We need to look at best practices in other countries. We need to look at what happened to people who have founded empires and have given way when they find that the institution needs to grow beyond [their] limited vision. We need to let go. We respected many of our founders but they hold on a little bit too long. And anybody who comes in with any new idea is seen as a threat. So they surround themselves with people who are loyal to them. I am on the board because I'm invited by so-and-so, and I think it's an issue that we need to talk about.

I think the other is….the issue of mission drift. I know that when we first started talking about commercialization of microfinance, there's been a big debate as to whether when you commercialize, there is going to be mission drift. And there's always this worry that when you're on a board, how do you ensure that you have people who share the same vision, [that they] do not come in with a purely commercial orientation? Stakeholder representation, we've talked about the needs to include clients in other industries. [Having] clients that are represented on boards [to] increases their ownership and participation. But in microfinance institutions, that's not the case….

Now, how does this affect MFI growth? We are seeing increasing erosion of…confidence and credibility amongst stakeholders. I can talk for my own country. It's been very difficult. We're trying to reposition and repackage the industry, but everywhere we go the government says, well, these [are] NGOs…we can't trust NGOs to run an industry as important as this. We are trying to lobby for policy and legislation, and it's amazing the amount of loss of confidence that people have in MFI's. Our clients are running away because they feel frustrated. Who do they go to? Who owns this NGO? And it doesn't help us when….Some of our CEOs and general managers, live in upscale areas and they drive cars that would put corporate CEOs to shame. So then the debate focuses on whether they're living lavishly because they are fleecing [the clients]. No wonder they charge high interest rates. So clients see this and it's really having an impact on…our growth, the donors, the staff members feel quite frustrated and alienated.

Now, because of lack of clear ownership and governance structures, this has impeded access to growth capital…..We all talk about donor funds drying up…at least I can speak for my country that there's donor fatigue. No donor wants to give money for [capacity] building. So many institutions are having to accept commercial capital, but then the question is, who are we lending [to], you know? Who owns this institution? I have two quick examples I want to share. One of members wanted to raise long-term capital and [was] frustrated by the fact that there's no donor funds available….They cannot put out this exciting idea [they had] to issue bonds. And we were all very excited [about the bonds] because we thought really this is a breakthrough, we're getting there. We can now go to the capital market and access capital….This institution is a company limited by guarantee. So it has to meet some of the conditions of the company [act]. But out there people are saying, well, that's still an NGO [so they can't do that].

There are no [willing] investors out there. We've had to have sessions with the capital market authority to educate them. And the same questions keep coming up. This is an NGO,…when people invest, where are they investing? We've had various options floated, for example, that MFIs may need to come together and form a special purpose vehicle…. so that the NGO buys ownership into this and this is the one…….this MFI borrowed from the bank, but then the board did not realize that their constitution did not empower them to borrow. So one of the board members, who had been kicked out, sued them. The case is in [now] court. In another [MFI], they borrowed and simply did not repay…. And they just took advantage of that little loophole and refused to pay. They went to court and the court is asking them, so who are you suing? So, it's a real issue.

….We have MFI's that have been in existence for the last 20 years. They are not growing because of some of this…lack of transparency. In my country we have rising cases of mismanagement of these institutions because there's no owner…there's no stake. Who provides that or [looks] at the financials? So some board members look up and they find…they cannot even pay salaries. And they wonder what happened?

…We need to restructure our boards. Often poor performance of MFI's is not detected or monitored. Board members with little financial experience come and they look at the financial statements that don't make sense to them. So they pass decisions and they don't even detect that the institution is not doing well. Until a donor, in one case… asks about an institution where…the board never realized that…the institution is doing so badly that they're not even repaying the loan that they had borrowed. In some of these cases, of course, the information is hidden by the management. But it just shows you how critical this is.

We need to recognize that effective ownership and governance are critical. ….We need to develop transparent board selection procedures…. Sometimes people call me and say, "We want you to be on our board," and I say, "Why?" You know? How did you decide? "Well, you know, because you can represent us." And I say, no, that's not it. You need to tell me, show me the selection criteria, convince me that I meet the criteria of being on your board and the processes of selection. We have to train people [to think this way]. Microfinance is new to many people. When you put a board in place, train them, give them exposure visits, whatever it takes to [grow] in that capacity. In microfinance, we cannot afford to be left behind the global best practice corporate governance movement. Sometimes we point fingers at our government, you know? Government is poor, but we, ourselves, in our institutions, we are doing things that would shame some of our most corrupt presidents.

So those are the challenges. It's a long process. We need to change the business model and change our attitude.

Read remarks by Timothy Lyman