managing risk.pdf

Managing Risk and Creating Value with Microfinance21Box 2.1 Investors as Board MembersThe Council of Microfinance Equity Funds surveyed MFIs and funders to determine the main concerns relatedto the parcipaon of investors in governance. The concerns were as follows:• Finding an appropriate balance between management and board; avoiding management capture ofgovernance• Determining appropriate management compensaon• Agreeing on an appropriate balance between social and financial goals• Working effecvely as minority shareholders, protecng minority shareholder rights, and formingeffecve shareholder groups• Establishing commonly accepted standards for conflict of interest, board member compensaon, useof independent directors, and so forthAlthough many public investors prefer to keep a distance from board parcipaon, an increasing numberof private microfinance funds are not as recent. They have tried to follow the ProFund example. ProFundwas located regionally, giving it the opportunity to stay involved on a connuous, real-me basis, andwas “universally appreciated” as a very engaged board member. In parcular, it is well informed; in closecontact with other board members, management, and other relevant pares; and willing and able toacvely parcipate beyond formal board meengs as necessary. Private investors such as MicroVest CapitalManagement and Blue Orchard Finance, S.A., consider governance part of their investment strategy. Inaddion to ensuring adequate returns, such investors maintain a rigorous focus on the return of principaland fiduciary responsibilies of the board.Source: Council of Microfinance Equity Funds 2005.GovernmentGovernment funding for microfinance has a long history in Latin America, where national and local governmentshave created microfinance banks, savings banks, and other entities involved in microfinance. Governmentsoften fund microfinance for a specific social or policy objective, such as combating poverty or fostering ruraldevelopment. Three of the most common vehicles for channeling government money to microfinance includeso-called state banks (entities that may be involved in retail lending), apex institutions (wholesale facilities thatinvest or lend in MFIs), and independent microfinance programs that may be administered by one or moregovernment agencies (De Montesquiou, El-Zoghbi, and Latortue 2008).Governments are mostly concerned with maintaining power and serving the population. In general, localgovernment ownership models for microfinance have struggled because of politicized policies, targetedsubsidized credits that distort markets, political interference in operations, and corruption. However, there area few examples of publicly owned MFIs that perform well, such as the municipally owned Cajas Municipalesde Ahorro y Crédito (CMACs) of Peru. Those CMACs, while subject to regulation by the BankingSuperintendency, have financial and administrative autonomy. Their institutional structure is rigidly defined bylegislation to ensure that each CMAC is an economically and politically independent organization. CMACsare governed by separate boards comprising local representatives, including, the private sector. Each CMACreports to a federation that monitors performance and conducts internal auditing.