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Microfinance Governance Matters, So Does Structure

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In response to the lively debate at Microfinance USA back in May between Errol Damelin, Wonga; Carlos Danel, Compartamos Banco; Adam Davidson, Planet Money, NPR; Ananya Roy, University of California, Berkeley; Felix Salmon, Reuters; and Eric Weaver, Opportunity Fund, Timothy Ogden wrote that focus should not be on whether microfinance institutions should be for-profit or non-profit. Tim writes for Financial Access:

What determines the course an organization takes over the long term -- whether it hews to a vision of serving the poor or pursues profit above all else, whether it flexibly adjusts to changes in markets and contexts or becomes hidebound and irrelevant, whether it maintains a commitment to a long term vision or shifts like the wind with fads of the day -- comes down to the governance arrangements that are put in place after the choice of profit status...

What are proper governance arrangements for a pro-poor institution? That's a question that deserves a lot more attention and debate. Most people today seem to accept that socially responsible, pro-poor for-profit organizations can exist. If so, what is the proper role of the poor in the governance of such an organization? Can poor clients deliver the kind of oversight necessary to check management? Similarly, how should power at a non-profit be divided between funders, managers and clients? The answers to these questions are critical but non-obvious. The industry would do well to think about them more deeply.

There is no doubt that governance is very important. Tim is right to say that it deserves far more attention than it is currently getting right now. The examples he uses of the AP crisis and the CAI scandal are perfect examples as to why governance is important.

However, I slightly disagree with Tim on the issue of profit motive. If the base supposition is that MFIs will sometimes not act in the best interest of the people they serve, then we need to look at how to solve that problem in the most complete way possible. Given that governance must improve, it is possible that it is not the only solution.

Panelist Eric Weaver, head of the Opportunity Fund, offers the same concern by writing in the comments section:

I continue to question how a for-profit institution, whether public or privately held, can truly be held accountable to a "pro-poor" agenda, other than through the good intentions of management and board, and ultimately the good intentions of the owners, at whose whim they serve. I agree this can and has happened with for-profit companies, but I think it is much harder to achieve and mantain when the profit motive is present.

The point is not to continue to make this the only discussion about microfinance. It gets top billing when it is not deserved and most seem to agree to that point. However, it should not be forgotten when trying to refine the microfinance industry. In fact, governance packages can be shaped to include language specific to profit motives of MFIs.

For-profit MFIs are not inherently bad, but additional motives and responsibilities can cause a shift in operations. My interest in the debate remains high because I am not entirely sold by either side of the debate. If I had to pick I would say that I am sympathetic to the non-profit side, but I want to continue to learn more. A hard look at the way that, say, Compartamos operates and grows should take place. The same goes for the non-profit side and some of the hybrid MFIs.

Understanding what model offers the best opportunity for the poor in a sustainable manner is of the utmost importance. So, let's keep the debate going rather than shelving it. While we are at it, let's also talk about governance, interest rates, predatory lending and so on.

In short, get your wonk on.

Watch the full debate from Microfinance USA here.
Read Tim's excellent post here.