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The Role of Good Governance in the Microfinance Industry with Gregory Casagrande


A carefully selected and well-managed board can help your enterprise reach its full potential. However, many social entrepreneurs are hesitant to elect a governing board, fearing it will limit the effectiveness of the management team. To determine what is good governance, we must first understand the term ‘governance.’ According to one definition, corporate governance “is the system of rules, practices, and processes by which a firm is directed and controlled.” “If assembled correctly, good governance can strengthen leadership and lead to better results,” says Casagrande, a serial social entrepreneur. A well-designed board can produce several benefits, including enhanced performance, improved shareholder relationships, greater strategic opportunities, and a favorable professional reputation in your respective industry. 

Gregory Casagrande is the founder of South Pacific Business Development (SPBD), a network of microfinance organizations in Samoa, Tonga, Fiji, Vanuatu and the Solomon Islands with the goal of eradicating poverty. The organization provides unsecured loans for the creation of simple and sustainable businesses, such as sewing operations, cow and chicken farms, and taxi services—to name a few. The venture is highly successful, with some of the business’ strategies resulting in nearly 100% loan repayment by borrowers. Before SPBD, several other organizations had attempted to embark on microenterprise initiatives but came up short. Casagrande believed these failures were due to poor management practices and chose to move forward with SPBD despite a lack of support. Here, Casagrande discusses the importance of good management and governance in microfinance institutions (MFI). 

What is a Microfinancing? 

Microfinance is a method for providing financially marginalized groups with the capital they need to start a business. Many of the recipients are in developing countries and are unable to get access to bank accounts, lines of credit, or loans from traditional banks. “Microfinance institutions can lift individuals from poverty and help them become more financially independent and resilient,” says Casagrande. Microfinance has played a particularly important role in helping women overcome poverty. In fact, according to the 2017 Microfinance Barometer, women are significant microfinance borrowers, making up 84% of the loans in 2016. By providing opportunities for financing along with the necessary financial knowledge, people have the chance to accumulate savings and improve their quality of life for themselves and their children. As a result of microfinancing, parents can help keep their children in school and offer them a brighter future.

1) Social Mission & Purpose

 While the governing board of non-profit enterprises are concerned with achieving their mission, for-profit boards are focused on generating healthy returns for their shareholders. If a social enterprise is structured as a profit-making entity, mechanisms must be put in place to protect the organization’s mission while allowing for adequate shareholder revenue. “Balancing purpose and profitability is not always an easy task,” says Casagrande. To avoid division between members, only candidates that consider both objectives important should be accepted onto the board. While candidates may have a natural bias towards one goal, it should not affect their ability to make sound decisions for the organization. Moreover, some enterprises adopt a hybrid legal structure that comprises of a for-profit and non-profit entity. For example, the non-profit may hold a golden share (nominal share that can outvote other shares) in the profit-making entity, allowing revenues to be applied to charitable activities. Overall, a good board will be able to define and uphold the social mission and purpose of the MFI. 

2) Develop & Approve Strategic Direction

The aims of an enterprise will likely evolve throughout the stages of the MFI’s lifespan.  At the organization’s founding, the MFI’s goal may be to prove its ability to provide financial services to a previously unbankable market. In the second phase, firms may aim to serve a wider audience to increase their positive impact on society. Eventually, when new competitors start to appear, the MFI may develop new products and services to differentiate themselves and remain profitable. In the case of SPBD, Casagrande explains their long-term goal is to create an “institution permanently dedicated to serving the financial needs of the poor.” Consequently, SPBD focuses on working exclusively with the most needy in the Pacific Islands and strives to help them achieve financial self-sufficiency. Ultimately, good governance will understand the importance of dual objectives and the need to alter the MFI’s goals over time.

In addition to setting strategic objectives, the governing board, along with management, must be able to monitor the achievement of its goals. The metrics an organization chooses to use must be relevant to the company’s intentions. For instance, a firm might opt to measure their profit, borrower retention, loan repayment, depth and breadth of outreach, percentage of female clients, efficiency, and more. To measure their success, SPBD developed various tools, including the “social metrics survey.” The survey gauges the poverty level of all new SPBD applicants to guarantee that the MFI works strictly with the disadvantaged. “This quantitative tool measures the quality of the applicant’s housing, sanitation, access to clean running piped water and electricity, and the quality of their children’s education. This enables us to compare family poverty levels objectively and to monitor our clients progress out of poverty,” explains Casagrande.

3) Organizational & Succession Planning 

Effective governance includes preparing a well-thought-out succession plan. Even if the organization seems to be running smoothly, unforeseen events and tragedies may call for a last-minute successor. The purpose of succession planning is to make sure an MFI can replace leaders when they leave, retire, or pass away. Adequate foresight and planning will increase the availability of experienced and capable employees who are prepared to assume the roles as they become vacant. “MFIs that fail to plan for the future may suffer financial damage, loss of experience or specialized skills, lack of clear structure, and a negative work environment,” cautions Casagrande. Governing boards can start the process by reviewing job descriptions for key positions and developing the preferred criteria for replacement successors. Moreover, the managing director should be involved in mentoring potential internal candidates within the organization. By being transparent with employees about succession planning, staff will be motivated to work hard to strive for promotions and improve their overall performance. Finally, the succession plan should be revised every year to take into account organizational changes and ensure important details are kept up-to-date.  

4) Risk Management

Another important role of governing bodies is mitigating various forms of risk. Internal risks are ones that arise from within an organization, including unauthorized, illegal, unethical, or inappropriate actions on behalf of an employee or manager. Additionally, internal risks may include failures in operational processes or unsafe working conditions. Social enterprises generally have a zero-tolerance policy for activities or behaviours that may threaten the company’s value or the ability of the organization to achieve its social mission. “Internal risks are best managed through active prevention,” advises Casagrande. Governing bodies will monitor and evaluate the systems that guide employee behaviour and decision-making to ensure desirable outcomes.

MFIs voluntarily accept some risk to generate returns, such as offering unsecured loans to their borrowers. To limit an organization’s strategic risk, leaders must design a comprehensive risk-management system. The system should reduce the likelihood of the threats materializing and provide guidance should the risk events ever happen. Furthermore, hazards that arise from outside the company are known as external risks. These threats may include natural or political disasters and significant macroeconomic shifts. Since it is next to impossible to prevent such events, board members and managers must focus on lessening their impact so that the company can bounce back from a negative event quickly.

5) Manage Financial Resources 

The board is responsible for making key decisions for the company, including whether or not to raise money. Like traditional business models, MFI’s can raise cash through debt or equity. Since equity investors have a strong influence on enterprises’ operations, the investors’ interests must align with the mission of the organization. While this may not be problematic in the MFI’s infancy, the interests of founders and equity investors may begin to deviate when the organization has to make decisions that call for a trade-off between profits and the mission. “There are advantages and disadvantages to both forms of financing,” explains Casagrande. If the board opts for debt financing, then members will retain their decision-making power. However, they may not be able to raise enough funds, which could hinder the MFI’s plans for growth. In contrast, new equity investors can provide greater access to capital, but these new investors will demand active involvement in the company’s decisions, which means losing some control. Current research indicates that social enterprises use multiple capital sources in order to be financially sustainable. Essentially, governance is needed to balance the different capital providers’ interests and ensure the MFI can accomplish its mission. 

Microfinance institutions, like SPBD, have proven effective in reducing poverty in developing countries. Since it’s founding, SPBD has had a direct positive impact on the lives of many tens of thousands of underprivileged families, especially the women and children in those families. Not only have members generated significant cash flow, but also, they have been able to change the course of their future in meaningful ways. As a result, microfinance institutions and their governing boards play a key role in helping underserved communities become more resilient.

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