Governance and Microfinance Institutions

This chapter reviews the microfinance performance and governance literature and provides an agenda for future research. In reviewing the microfinance governance literature two issues stand out: First, most papers concentrate on the relation between corporate governance and financial and social performance.The chapter provides an overview of this literature. The chapter also provides new empirical evidence on governance and MFI risk, an issue that is almost completely neglected in the literature. In this empirical study we try to find out whether larger boards make less extreme decisions by testing whether the larger boards are associated with less return variability. Second, empirical microfinance governance studies are guided by agency theories developed for corporations and western nongovernmental organizations. Corporations maximize profits, whereas MFIs have dual objectives, which theories on optimal incentive structures have to take into account. Within the microfinance industry, there are many different types of MFIs ranging from the most commercial banks to the least commercial NGO. They all decide on a different trade-off between their financial and social objectives. Moreover, one-size-fitsall governance arrangements do not exist. MFIs' funding structures are very different, which creates a very heterogeneous set of governance problems. This chapter pleas for new theory on how optimal incentives throughout the institution can stimulate the MFI to reach its dual objectives, and shows how different funding structures create different governance problems.