Governance practices in microfinance lending affect institutional financial performance.
In Nepal, Micro Finance Institutions (MFIs) are an important source of loans for small to medium enterprises and households. Financial services from 16 MFIs are available in 69 of the country's 75 districts. The Central Bank's regulatory requirements for MFIs are not as stringent as for commercial banks. Dilip Kumar Jha, one of our Auckland International Campus Lecturers, has been investigating the governance of MFIs in the current regulatory environment.
Dilip gathered publicly available data about the Nepalese MFIs, mainly from the mixed market for international MFIs, supplemented by information from their websites and annual reports. Then he analysed the data, comparing key aspects of their governance with their financial performance.
Dilip's recommendations are:
- The CEO of an MFI should not also be the Chair of the Board. This dual role is common practice in Nepal, unlike New Zealand, but MFIs with a Chair who was not also the CEO performed better financially.
- Women directors should be independent of the other directors to add value to the Board. Nepalese MFIs are required to have a woman on the Board, but Dilip found that this was often a relative of another Board member.
- MFIs with greater diversity of caste amongst Board members performed better. Nepal is a Hindu country with a caste system.
Dilip will communicate his findings to the Central Bank in Nepal, to bring them to the attention of the MFIs. Tightening up the regulatory environment with respect to governance would be likely to improve the financial performance and hence the stability of the MFIs.
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Image credit: keso s, used under Creative Commons licence CC BY-NC-ND 2.0