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Deteriorating State of Good Governance in Microfinance Institutions: Experts warn to be Vigilant on time

Experts have argued that the lack of good governance in Microfinance Institutions (MFIs) has led to deviations from its main mission of serving the lower strata of the population and following fair practice of lending objective. Although it gained popularity in the first two decades by adhering to its philosophy and principles of serving the poor; MFIs failed to perpetuate it into the organizational culture in the last decade. The period not only failed to serve the ultra-poor but also created many cases of over indebtness among the clients wherever they operated due to poor governance in MFIs; experts concurred during the panel discussion on CSD's webinar Episode 15.

The 15th Episode titled “Challenges to Good Governance of MFIs in Nepal” was organized on September 26, 2021, virtually and featured three key microfinance experts from the country- Mr. Bhesh Raj Panthi, Mr. Dharma Raj Pandey, and Mr. Bishnu Prasad Pathakas the panelists. The program was moderated by Mr. Ram Chandra Joshi, Chairman of the Neighbourhood Society Service Center (NSSC).

The Chairman of the Center for Self-help Development (CSD), Mr. Shankar Man Shrestha said that the microfinance sector is becoming aimless due to lack of good governance and microfinance practitioners and regulatory authorities should be aware of this in time. He was of the view that the microfinance sector could not make a significant contribution to poverty alleviation in recent times due to lack of discipline among MFIs and indifferent on the past regulatory agencies. The purpose of which microfinance initiated is now lost. He said, good governance will determine the sustainability of any institution or sector. At present, the microfinance sector looks sound from the outside. But from the inside, there are many problems. Currently, issues such as multiple financing and over indebtness and clients have posed serious challenges to the microfinance sector. The wrong tradition of giving bigger loans beyond the need and capacity of client will put the clients as well as a concerned institution into a dangerous trap. Currently, MFIs are on a competition to harness more and more profit. But deceitful practices of lending in the long run lead to disaster. NRB should take strong action against the wrong doings.

One of the panelists of the webinar, Mr. Bishnu Pathak, the first President of the Nepal Microfinance Bankers' Association (NMBA) said, “Good corporate governance in microfinance and cooperatives has become a serious challenge.” He said, “There is nepotism in management and various interest groups are forcing to have taken advantages and in some cases even reports are found manipulated to depict real picture of financial performance.” He said, “The monitoring of the regulatory body is weak. The prerequisites of good governance are participation, accountability, responsibility, adherence to rules; cooperation, inclusion, effectiveness and efficiency are deteriorating gradually.” He emphasized on the need of internal control and effective to control deviations in operation.

Another panelist, Mr. Dharmaraj Pandey, former president of the Nepal Microfinance Backers' Association, also said, “Microfinance in the past did great job to reduce poverty in the country but at present it ignored all the principles and best practices and their motive has been to raise profit. The main problem is the weakness of the regulatory body. It should follow a zero tolerance policy towards those who put the client into loan trap and principle of multiple lending. The regulatory body needs to get vigilant and watchful of the immoral practices of lending and issue directives to control wrong practices.”

Another panelist Former Chief Executive Officer of the First Microfinance Laghubitta Bittiya Sanstha Ltd, Mr. Bhesha Raj Panthi, opined that wholesale lending institutions should also play a role for good governance of MFIs. “The wholesale lenders should make sure that the MFIs follow good governance norms and also supervise these operations and practices in depth. They should make random check of their clients and see if they also finance right brewers and right amount of money as per the need and capacity of the borrower.” he said.

Mr. Ram Chandra Joshi, Chairman of the Neighbourhood Society Service Center, and the moderator of the program, said that the CEO of MFIs must play a key role in ensuring good governance in the organization. He further said, “Chief Executive must first be disciplined himself and the staff will follow him. He should be responsible to the members and emphasize on lending practice conducive to the upliftment of the poor. If he is good and effective, good governance just happen without hindrance and the organization will be financially strong and sustainable. There is no need to be afraid of epidemics they come and go.”

During the open discussion, Chairman of the Nepal Rural Development Society Center Mr. Mani Kumar Arjyal, Chairman of the Swabalamban Laghubitta Bittiya Sanstha Ltd Mr. Ram Kumar Shrestha, and Chief Executive Officer Mr. Uday Raj Khatiwada and others expressed their views with regards to maintaining good governance in MFIs. There were 125 participants from 31 MFIs, Cooperatives, Banks, and NGOs in the webinar.

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