Measuring Governance in Microfinance: Initial Findings from a Pilot Project

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Apr 1, 2012
Micol Pistelli, Stephanie Geake, with Adrian Gonzalez

Executive Summary

Until recently, corporate governance has been a subject of secondary interest in analyses of the microfinance industry. However, the recent economic downturn in some markets and the risk exposure of some microfinance institutions (MFIs) to bailout[1]  has led many in the industry to identify good governance as the primary differentiating factor between those institutions that overcome crises and those that do not[2]. 

To enhance understanding of MFI Board structure, policies and activities,  Microfinance Information Exchange (MIX) tested a new set of governance indicators in 2011 among a sample of 162 MFIs across 57 countries. These indicators were selected by the Institutional Governance Working Group of the World Microfinance Forum of Geneva[3].

Reporting on these indicators showed a positive correlation among factors such as the presence of risk management functions, internal auditing, and Board committees, suggesting that good MFI governance procedures do not exist in isolation from each other.

MFIs of different sizes and geographic locations showed high levels of Board independence and diversity of experience/qualifications among Board members. We observed reasonable levels of review in key policy areas and most MFIs appear to have risk management and auditing functions in place. Nevertheless, no significant correlation was found between governance and financial performance in the sample, possibly due to the small sample size and/or the lack of historical governance data.

The analysis is also enriched with findings from a separate, older effort on the part of MIX to collect governance indicators related to social performance management. These indicators show that social performance management is a concern among MFI Boards but that serious commitment to the topic, as measured by the presence of a social performance Board committee, is not yet widespread.

While more in-depth research is needed to identify best practices for governance, our initial results reveal that some of these pilot indicators could provide useful analytical insights if tracked over time.

1) Introduction:

In any industry, good governance is a necessary component to securing long-term sustainability and to aligning policies and strategies with an institution’s mission or goals. Thus, in order to determine the best practices for MFI governance, we need to understand the relationship between corporate governance and performance. While some efforts have been made to collect and analyze data on governance[4], there are no large-scale data sets that allow a detailed analysis of what works best in microfinance governance.

To gain a better understanding of the current state of governance in the industry, the World Microfinance Forum Geneva created an Institutional Governance Working Group to identify a set of easy-to-measure governance indicators. The Working Group selected 10 such indicators and asked MIX to include them in a pilot survey administered in late 2011. The purpose of the survey was to gather information on MFI Board structures and to learn basic facts on how MFIs manage risk, change policies, and implement actions through the work of committees.

This paper presents the rationale behind the test questions selected and summarizes the findings of the survey.

2) Governance Indicators:

MIX collects and analyzes financial and social performance data from MFIs around the world, relying on validated data and source documents (e.g. audits) whenever possible. In 2011, MIX created a pilot survey to test 22 new indicators[5], 10 of which focused on governance as designed by the Institutional Governance Working Group. 

The governance questions were assessed using two main criteria: which yielded sufficiently reliable data to include in standard data collection and whether any showed a meaningful link to MFI performance.

Since an MFI’s Board of Directors is the nexus between stakeholders and governance[6], the 10 governance questions in the survey focus mainly on Board structure and characteristics, Board activity and engagement, and risk management. 

This section gives a brief overview of the survey’s governance indicators. More information on the individual questions can be found in Appendix 1.

1. Board Structure and Characteristics

  • Indicators: Number of Board members, Board member qualifications, number of independent Board members, number of Board committees

A good Board should encompass a range of expertise and experience as well as represent key stakeholders and maintain a significant degree of independence. The Board of Directors, through its members and advisors, should have the collective knowledge and experience necessary to meet strategic demands faced by MFIs (mainly dependent on the mission, the institutional development stage, and the external environment)[7]. As MFIs grow in scale and complexity, we expect their Boards to grow similarly. This assumption led us to test indicators related to Board size as well as to the qualifications and independence[8] of its members.

In addition, the bulk of the Board’s work is often done at the committee level. Therefore we also gathered information on the presence of Board committees.

2. Board Activity and Engagement

  • Indicators: Frequency of Board meetings, Board meeting attendance, Board policy changes

To assess Board activity and commitment towards an MFI, we included questions regarding meeting frequency and attendance. To evaluate Board effectiveness in developing policies addressing key business drivers, we asked MFIs which Board policies had changed within the last fiscal year. 

3. Risk Management:

  • Indicators: Separation of Chairman and CEO, funder voting rights on committees, presence of risk management and audit functions

As an organization increases in complexity, separating the CEO function from the Chairman function serves to reduce negative effects of power concentration and the risks associated with losing a key person (“key person risk”). It is important to keep in mind, however, that such separation may not be apparent in fast-growing MFIs. Similarly, collecting information on voting rights allows us to assess the extent of power concentration at the Board level.

A widely accepted factor of good risk management is establishing an independent risk management and internal audit function. Hence, the Working Group included the presence of such functions as an indicator in the survey.

3) Sample description

MIX sent the survey to 1,000 MFIs, 162 of which responded. MFIs that responded comprised mainly of institutions more active in reporting both financial and social performance information to MIX. Thus, we may consider them to be MFIs committed to information transparency, and we therefore acknowledge self-selection bias in our sample results.

The respondent MFIs were located in 57 countries. Table 1 lists the countries with the most respondents.

 Table 1: Countries with highest number of MFI respondents


Number of respondents
















The vast majority of reporting MFIs were from Latin America and were NGOs and NBFIs.

Chart 1: MFIs reporting by legal type

Chart 2: MFIs reporting by region


The median outreach of the respondent MFIs’ was 17,000 active borrowers, ranging across a very wide range (from 200 clients to 8 million).

The majority of individuals responding to the survey were CEOs/Executive Directors, followed by Heads of Financial Departments/CFOs, and Heads of other departments (e.g. Research, HR, etc).

In order to reduce the burden on MFIs filling out the questionnaire, the survey was structured such that it asked all MFIs only those questions considered most relevant, while the remaining questions were spread out among smaller groups. All MFIs received questions related to Board size and qualifications, Board independence, and frequency and attendance of Board meetings, while the remaining questions were divided among specific MFI groupings[9].

4) Basic findings

Starting with Board composition, respondent MFIs have a median of seven Board members, with a minimum of three and a maximum of 15. The number of Board members increases with MFI size (Chart 3).

Chart 3: MFIs Board and size


On average, MFIs of all sizes and geographic locations report Board independence and diverse Board experience/qualifications.

More than 80 percent of MFIs separate the CEO role from the Chairman of the Board role. Independent members make up 67 percent of the median Board. The majority of MFIs have Board members with multiple qualifications, with finance/microfinance and business experience being the most common (Table 2).

Table 2:  Does at least one of your Board members have the following qualifications?




I don’t know

No Response

Formal financial qualification





Formal legal qualification





More than 10 years’ experience in banking





More than 10 years’ experience in business





More than 7 years’ experience in microfinance





More than 5 years’ experience in market research





More than 2 years’ experience in SP measurement and management






The majority of Boards in the sample meet with reasonably high frequency during the year. Legal charter seems to matter for this indicator, as the majority of credit union and bank Boards tend to meet with higher frequency than Boards of NGOs and NBFIs (Chart 4). Size does not appear to correlate with meeting frequency (Chart 5). Eighty-four percent of Board members attended meetings.

Chart 4: MFI Boards meeting more than 10 times a year

Chart 5: Frequency of Board meetings and median size


Half of the MFIs sampled for this question reported having three or more Board committees, while 18 reported none. The most common committees were “executive”, “risk” and “audit”.

Younger MFIs – those established after 2001– have a median of four committees, while older MFIs have a median of only two. This suggests that the perceived need to establish and maintain committees might be more common among younger MFIs and that more established MFIs do not feel as strongly. No significant relationship was found between MFI size and the number of Board committees. The vast majority of MFIs have funders whose representatives do not sit on the MFIs’ Boards of Directors.

Table 3: Does the Board have the following committee?




No Response

Executive committee




Risk committee




Audit committee




HR committee




Remuneration committee




Ethics committee




Funding committee




Transformation committee





With regard to risk management, 58 percent of MFIs reported having a risk manager or a team dedicated to risk management, while 77 percent reported having an internal auditor or a team dedicated to internal auditing. Both functions tend to report to the CEO contrary to accepted best practice[10].

Finally, concerning policy changes, MFIs show high levels of review/decisions in key policy areas (especially regarding internal controls, client protection, compliance, and funding sources) and 63 percent reported having changed five or more areas over the past year.

Table 4: Proportion of MFIs reporting policy changes in 2011 (View larger size)


5) Results from correlation analysis

 MIX tested for correlations between governance indicators and MFI financial performance. The analysis revealed:

  • No significant correlation between most governance indicators and financial performance. The presence of executive, risk and audit committees does appear positively correlated with staff productivity (number of borrowers per staff) but not with other performance indicators.
  • Positive correlations were found among various governance indicators, showing the importance of having certain governance policies and procedures in place. MFIs that change policies more often show a positive correlation to the number of skills represented on the Board and the presence of an internal auditor. A strong correlation also exists between MFIs with executive, risk and audit committees, and the existence of risk management functions.
  • Board size, possibly beneath some limiting value, does not seem to be associated with the presence of other governance indicators. Instead, we found correlation among indicators related to Board structure: the presence of committees and the variety of skill sets.

 MIX further explored the possible relationships between financial performance and governance indicators through regression analysis and did not find any statistically significant results. In particular, we focused on productivity (number of borrowers per staff), efficiency (operating expenses as a percentage of loan portfolio and cost per borrower as a percentage of GNI per capita), and portfolio quality (PAR > 30 days and write-off ratio). On the governance side, the indicators selected were Board independence, number of Board members, number of Board skills, number of committees, and the existence of auditing and risk management functions.   

View Table 5: Correlation analysis between governance and financial indicators

6) Governance and social performance

For the past three years, MIX and the Social Performance Task Force (SPTF)[11] have collaborated on identifying a set of governance indicators tailored to monitor social performance management at the Board level[12]. These indicators identify whether members of an MFI’s Board of Directors have been trained in areas relevant to social performance management and whether a formal Board committee exists to monitor social performance.

MIX data show that, across a sample of 405 MFIs, 77 percent ensured that social performance issues were identified as components of an MFI’s strategic and business plans. As for more in-depth commitment, 45 percent of MFIs reported organizing staff and client visits for Board members, while just 21 percent of MFIs reported having a standing social performance committee that regularly reviews social performance issues. Thus, while a growing number of MFIs include social performance assessment into their operations agenda, it is not yet common to have Board committees that specifically monitor social performance. Furthermore, one should keep in mind that this particular sample exhibits self-selection bias: it contains only those MFIs serious enough about social performance monitoring to complete the rather lengthy (and now defunct[13]) MIX/SPTF Social Performance Standards Report.

Table 6: Governance indicators related to social performance management (MIX data collection 2009-2011)

Governance Indicators/MFIs reporting by legal status

Banks (33)

Cooperatives (42)

NBFIs (157)

NGOs (160)

Rural Banks (13)

Total (405)

MFIs with a standing social performance committee that regularly reviews social performance issues







MFIs that organize staff and client visits to help Board members understand how operations are achieving the mission







MFIs that ensure that social performance issues are identified as components of the MFI’s strategic and business plans







Given the possible linkages between social and financial performance[14], any further survey or case studies aiming at identifying best practices in governance should also take into account the capacity of the Board to “protect” the social mission of the institution over time. In the same vein, it would be helpful as well to consider the relationships between governance indicators and the level of information an MFI has at its disposal regarding client and staff satisfaction, and the poverty level of its clients.

7) Conclusion

 The strength of institutional corporate governance cannot be adequately measured by a questionnaire concerning a single time period. Only through systematic, longitudinal time series analyses that repeatedly capture indicators before and after governance procedures have been introduced will indicative assessments concerning institutional performance be made. At the same time, in-depth interviews with Boards and management can help elaborate on the quantitative information captured through surveys.

While the results of this pilot should take these limitations into account, we can already conclude that some indicators are worth full integration into MIX’s annual data collection, as they show the potential to provide useful insights for the holistic assessment of a MFI if tracked over time. Indicators that showed the strongest correlation with each other are: number/type of committees and existence of auditing/risk management functions.

In addition, any further test of governance indicators or case studies should take into consideration the relationship between governance and social performance management to allow an evaluation of whether a Board effectively monitors social performance targets in the same way that it regularly monitors financial performance.


MIX would like to thank the Michael & Susan Dell Foundation, the Ford Foundation, The McGraw-Hill Companies, and Cisco Foundation for their generous support of MIX’s social performance research.

Thank you to the Working Group members Bob Bragar (Local Voice 4 Development), Anne-Marie Chidzero (Africap), Carlos Danel (Compartamos), Deborah Drake (CMEF/ACCION), Laura Foose (SPTF), Marten Leijon (MIX), Ira Lieberman (LIPAM International), Kate McKee (CGAP), Frank Rubio (Oikocredit), Alex Silva (OMTRIX), Vidhi Tambiah (WMFG), and Massimo Vita (Microfinanza Consulting).

The World Microfinance Forum Geneva would also like to thank Compartamos Banco and Oikocredit for their support of the Governance Working Group initiative.

Special thanks to Scott Gaul, Michael W. Krell, Marten Leijon, Ira Lieberman, and Vidhi Tambiah for their comments on this paper.


APPENDIX 1: Governance indicators and reasons for selection:

  • Indicator 1: How many Board members does the institution have?

A Board should be of a certain size to minimize concentration of power, ensure stakeholders are represented adequately, maintain a degree of independence from day-to-day operations, and have the capacity to make the right decisions at the right time. In most institutions, a quorum is required to hold a legally recognized Board meeting. If Board membership falls below seven members, as an example, and some members are absent from a meeting, it is difficult to obtain a quorum. If the number of directors required to make a quorum is few, decision-making becomes concentrated in relatively few hands. At the same time, a very large Board can be cumbersome and inefficient. This indicator aims to gather information on typical Board sizes in MFIs and to test whether better-performing institutions are characterized by a certain Board size. We expect Board size and scale, number of clients, portfolio size, and company revenues all to be positively correlated up to a certain number of Board members.

  • Indicator 2: Are the CEO and the Chairman of the Board the same person?

Separating the CEO function from the Chairman function reduces concentration of power. It is important to keep in mind, however, that such separation may not be apparent in fast-growing MFIs. Large-scale MFIs that separate CEO and Chairman roles should display lower volatility in overall performance; this includes growth of clients, portfolio and revenues as represented by the standard deviation of clients, portfolio size, and revenues over time.

  • Indicator 3: How many of your Board directors are independent?

 An independent director is defined here as a person who is not currently and has never at any time been affiliated with the institution or its senior executives through an ownership, employment, business, or family relationship.

Independent directors offer the potential for a broader skill base and a wider perspective on various issues. These, in turn, can be beneficial to a corporate entity’s decision-making process[15]. Companies that invite independent directors to take an active Board role are more likely to assess risks differently than those that do not. We expect Boards with active independent directors to show greater financial resilience over time than those without.

  • Indicator 4: Board qualifications

Does at least one of your Board members have:

-    Formal financial qualifications? (Y/N)

-    Formal legal qualifications? (Y/N)

-    Long experience in banking (>10 years)? (Y/N)

-    Long experience in business (>10 years)? (Y/N)

-    Substantial experience in microfinance (>7 years)? (Y/N)

-    Considerable experience in market research (>5 years)? (Y/N)

-    Experience in social performance measurement and management (>2 years)? (Y/N)

As companies increase in complexity their Boards increasingly require specific skills and benefit from members with greater experience. The CMEF governance guidelines suggest that Boards should bring a range of skills useful to the MFI, including financial skills, legal knowledge, knowledge of the target market, and a social perspective. This question aims to gather information on the range of skills and experience present on MFI Boards. Qualifications are an indicator of skills; years of experience increase the likelihood that a Board member has witnessed a variety of situations. Over time, MFIs with a broader array of qualifications and greater experience represented on their Board should display greater financial resilience and lower risks than those with a narrower array of skills and less experience.

  • Indicator 5: How many times did the Board meet within the last fiscal year?

This indicator aims to give an indication of how active the Board is and how effective it is in developing policies that address key business drivers. A very low meeting frequency may indicate disengagement.  Very frequent meetings could indicate a Board that micromanages operations and may not be optimal either. Boards of banks and credit unions may be required by regulation to meet monthly, however. We expect Boards with very low meeting frequency (once per year) or very high meeting frequency (more than 12 times per year) to have lower performance over time than those with a meeting frequency between one and 12.

  • Indicator 6: Within the past year, how many directors on average attended each Board meeting (physically or by phone) 

Board members should show engagement with the institution and commitment to the Board position. We expect institutions with higher Board meeting attendance (physical or by phone) to perform better over time than those with low attendance. It is worth noting, however, that phone attendance does not necessarily equate to physical attendance, which allows Board members to exchange views directly with management and other Board members.

  • Indicator 7: Presence of committees

What Board committees exist?

-    Executive Committee? (Y/N)

-    Risk Committee? (Y/N).  

-    Audit Committee? (Y/N).  

-    Human Resource Committee? (Y/N).

-    Remuneration Committee? (Y/N).  

-    Ethics Committee? (Y/N).  

-    Social Performance Committee? (Y/N).  

-    Funding Committee? (Y/N)

-    Transformation Committee? (Y/N)

-    Other Committee? (Y/N) Please specify:……………….

For all committees, if yes,

-    Do founders of the institution have voting rights on this committee? (Y/N)

-    Do chief management officers have voting rights on this committee? (Y/N)

“Committees are the workhorses of the Board”[16]. That is to say, most of the work of an MFI Board should be done at the committee level. This is particularly important as the MFI grows in terms of scale and complexity. Again, this is particularly true for transformed MFIs operating as non-bank financial intermediaries or as deposit-taking commercial banks as well as for institutions that have added other products such as insurance, remittances, or housing rehabilitation. These additional products and services increase the risk profile of an institution. Good governance practices dictate that such an MFI should adopt an audit committee and a risk management committee at minimum. Other committees, such as a compensation and a compliance committee, are also desirable. The formation of Board committees is also an indicator of Board activity. This question aims to gather information on which committees are most common in MFIs.

  • Indicator 8: Do funders of the institution have voting or voice rights on any of these committees? 

 -   Executive committee

-   Risk committee

-   Audit committee

-   HR committee

-   Remuneration committee

-   Ethics committee

-   Funding committee

-   Transformation committee

Boards that welcome funders to vote on matters important to them build investor support. They are likely to enjoy more reliable funding sources in stressful times and will benefit from a lower cost of capital. We expect Boards that give voting rights to funders to enjoy a lower cost of capital over time.

  • Indicator 9: Has the Board formally appointed:

-    A risk manager or a team dedicated to fulfill the risk management function? (Y/N)

-    An internal auditor or a team dedicated to fulfill the internal audit function? (Y/N)

If Yes, who does the manager or team leader report to?

-    Board of Directors

-    Chair of the Board

-    Board Committee

-    CEO

-    Other

An independent risk management or internal audit function that reports directly to the Chairman of the Board or a Board committee is likely to reduce deliberate misappropriation of company assets by the executive team. We expect well-functioning internal audit or risk management functions to increase long-term profitability.

  • Indicator 10: In the past year, did the Board change policies concerning:

-    Institutional transformation? (Y/N)

-    Senior executive succession? (Y/N)

-    Senior executive compensation or incentives? (Y/N)

-    Product range? (Y/N)

-    Product distribution network? (Y/N)

-    Source of capital? (Y/N)

-    Client protection? (Y/N)

-    Internal controls? (Y/N)

-    Regulatory compliance? (Y/N)

-    Reputation? (Y/N)

This question aims to gather information on how actively Boards address key issues and adapt policies to suit the institution’s evolving needs. Answers to this question are verifiable through Board minutes, which should make it easy for institutions to respond accurately.


[1]One of the most notable cases was the liquidation of Banex in Nicaragua

[2]Marulanda, B., Fajury, L., Paredes, M., Gomez, F. (2010), “Lo Bueno de lo Malo en Microfinanzas: Lecciones Aprendidas de experiencias fallidas en America Latina”, study funded by FOMIN/BID, IAMFI, Calmeadow, Deutsche Bank Foundation and ACCION’s Centre for Financial Inclusion.

[3]The World Microfinance Forum Geneva (WMFG) is an international association that assists high-level stakeholders in their decisions regarding responsible investment in inclusive finance.

[4] For example the PROMIFIN initiative in Central America, Oikocredit’s ESG scorecard and the Fintech governance data collection in Africa.

[5]  These indicators tested areas such as social responsibility to clients and staff, risk management, governance, and expected profitability of the MFIs.

[6] CMEF governance guidelines, page 2.

[7] Massimo Vita and Juan Vega Gonzales: Evaluation and Development of Good Governance in Microfinance Institutions, May 2011.

[8] An independent director is defined here as a person who is not currently and has never at any time been affiliated with the institution or its senior executives through an ownership, employment, business or family relationship.

[9] The testing methodology was developed in collaboration with Statisticians Without Borders.

[10] The Institute of Internal auditors recommends at least a dual reporting structure and the Greenbury, Hampel and Cadbury Committees recommend reporting to the Audit Committee or Chairman, not the CEO.

[11] The SPTF is an international group composed of investors, donors, MFIs, microfinance networks, research agencies, and other stakeholders united in the goal of defining, measuring, and improving the social performance of MFIs.

[12] The MIX/SPTF governance indicators are distinct from those discussed in the earlier sections of this article and were collected via a different channel than the survey discussed above.

[13] In 2009, MIX started to collect a pilot set of 22 social performance indicators’ categories selected by the SPTF designed to assess how an MFI aligns its systems to its mission and how it uses social performance data to reach its goals. These categories have evolved over time as a result of industry feedback and past experience, and today they have been reduced to 11 categories. For more information visit: /social-performance/Indicators

[14] For studies related to the correlation between financial and social performance, see MIX data Brief #7: “Microfinance synergies and trade-offs: social vs. financial performance outcomes in 2008.”

[15] CMEF (2005) Governance Guidelines, p. 7.

[16] CMEF (2005) Governance Guidelines, p. 20