Governance of Microfinance Institutions 6 th EMN Conference

1. Governance of Microfinance Institutions6th EMN Conference Tony Myron Small Business Finance EBRD4 June 2009

2. Corporate Governance - EBRD • EBRD is an experienced investor in financial institutions • Currently 61 Equity investments in FIs in 23 countries (€780M?) • Cumulative portfolio totals 125 investments in 28 countries (over € 2 billion) • 48 Bank Board seats • EBRD is committed to the best international standards

3. Good Corporate Governance: What is it? • Combination of: • Working to acceptable international standards • Commitment to transparency • Respect for laws, best practice and non-present Shareholders • Not a QUALITY or COMPETENCE issue • More critical when applied to publicly-traded stocks • Easier to recognise ‘bad’ Corporate Governance • Good corporate governance is reflected in better financial performance

4. Quality of Corporate Governance Legislation in the EBRD region (2007)

5. TajikistanCorporate Governance – Laws on the books (2007)

6. Overview of voluntary Corporate Governance Codes in the EBRD Region

10. Corporate Governance: EBRD’s Approach • Applies to all businesses: public and private • EBRD expects best international standards of: • Integrity of ownership • Financial Disclosure • Ethical business behaviour • Tax compliance • Environmental performance (including remedial work)

11. EBRD Activities • Policy dialogue: Level playing field investment climate • Legal transition: Technical co-operation to improve laws e.g. bankruptcy, mortgage etc • Active investor: Best international standards demanded. Covenants in loans • Reacting to ‘abuse’: Pro-active use of courts • Support for independent and competent financial press and media

12. Bad Corporate Governance is costly: Lower quality employees Employees do not feel ‘safe’ Lower quality customers Inability to raise international finance Poor domestic reputation More limited growth prospects Good Corporate Governance Matters Less shareholder value in long run

13. EBRD Lessons Learned • Quality/integrity of Shareholders and Management is a key issue • Good corporate governance normally ‘adds value’ • Investors definitely penalise listed companies with perceived poor corporate governance approach • Requirement for: - An effective court system to deal with abuses - Penalties for ‘bad corporate governance’ - Independent media to highlight abuses • Greater understanding of issues such as conflicts of interest, related party transactions – greater desire to build good businesses • Success stories breed imitators

14. Main Governance issues in MFIs • Level of development uneven and governance poorly understood • Division of responsibility between Board and Management often weak • Board candidates often not qualified • Ownership interest not clear in some non bank MFIs • MFIs in many countries not regulated and have no proper corporate structure • If no corporate charter then board operates in legal vacuum • Related party issues • Transforming institutions need new skills and intensive training • Networks may weaken power of independent board • Over reliance on key individual

15. EBRD Actions on MFI Governance • Appoints experienced directors and observers • Seminars and training for all nominees • Regional, country and institution workshops • Standard monitoring package encourages transparency • Dedicated unit and specialist lawyer • Equity unit managing all equities

16. How to professionalize Governance of MFIs • Appoint experienced directors – trend in Bank is now to appoint external directors • Increased training and seminars – now organising a workshop for 15 directors in Russian financial institutions • Appropriate conditionality in LA and SA re governance • Encourage regulatory development • Establishment of Audit, Credit and other committees

17. MFI lessons learned • Basic principles not understood particularly in non bank MFIs • Maximum of three appointments per director • Insistence on international standards, IFRS, operating procedures, credit committees • Press regulatory reform and inclusion of non bank MFIs • Shareholder oversight and internal audit are critical • Networks tend to have better standards and backstopping ability • In turnaround situations, directors should have appropriate experience • Corrective active plans should be negotiated up front • Composition of board should be appropriate

18. Main recommendations to microfinance programmes • Individual country economic, political and legal environment must be understood • Quality of governance should be part of due diligence • MIS and operating systems of MFIs need to be appropriate • Implementation of best practice standards • Lenders and investors should co-operate and co-ordinate • TA deployment is in many cases vital • Active monitoring against benchmarks and milestones • EBRD legal specialist in Governance is always available for consultation

19. Corporate Governance Principles SHAREHOLDERS REGULATORS STAFF GOOD CORPORATE GOVERNANCE & PROFESSIONAL STANDARDS Creates Value LOCAL & INTERNATIONAL AUDIENCE (e.g. lenders) CUSTOMERS