Financial institutions have just one bottom line to look after, but microfinance institutions or MFIs must protect two bottom lines. One, of course, is business sustainability. The other is outreach.

Keep in mind that, for MFIs, business sustainability connotes more than it does for other financial institutions. To understand this, we need to understand the evolution of microfinance. MFIs evolved as development intervention instruments. Not only that, they evolved as direct intervention institutions in poverty alleviation.

To understand what governance means in the world of microfinance, we must know how MFIs function. MFIs believe that the poor are entrepreneurs created by their environment. They exist from moment to moment, from one day to the next, and they have to be enterprising to tackle the challenges that every moment of life throws at them.

The question raised during the 1960s was, what if such enterprise was channelled into productive engagements and such poor turned into micro-entrepreneurs? Instead of giving them handouts or dole or subsidies, what if they were helped to earn their own living with small loans? Such entrepreneurs powered by small loans could even create indirect employment. In short, every entrepreneur helped would have a ripple effect.

But borrowing money requires collateral! Without any collateral to offer, poor entrepreneurs could not get the cash they needed to connect to the market and move out of the vicious cycle of poverty into a cycle of prosperity.

So the next question was, what if a mechanism could evolve so that these entrepreneurs could access some capital to power their businesses? This mechanism could solve a major challenge in development. Thus evolved the concept of microfinance institutions. They would provide small loans to the poor without asking for collateral as understood in the business of lending money. Borrowers would be formed into groups and made to understand that the group would be responsible for each other’s repayment default.

Hence, MFIs were tasked with a mission and their governance required parameters different from those of conventional financial institutions.

Other financial institutions do not require to handhold their customers. But MFIs monitor, help and teach their clients how to keep their financial capital productively employed. Environment protection was also an issue as the poor had a more direct symbiotic relationship with nature. For example, disposable saal leaf plates are made by the poor aspiring to ride out of the vicious cycle of poverty into a cycle of prosperity. If the environment is denuded of saal trees, the first casualty would be their livelihood.

So MFIs, despite being financial institutions, are here with a mission defined by the development needs of the people at the bottom of the pyramid. Their governance is different from that of other financial institutions. In this short space, I just took a shot at making you realize why and how. I shall be back with my views on governance in a subsequent blog.