Research Handbook on International Banking and Governance
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Research Handbook on International Banking and Governance

Edited by James R. Barth, Chen Lin and Clas Wihlborg

The contributors – top international scholars from finance, law and business – explore the role of governance, both internal and external, in explaining risk-taking and other aspects of the behavior of financial institutions. Additionally, they discuss market and policy features affecting objectives and quality of governance. The chapters provide in-depth analysis of factors such as: ownership, efficiency and stability; market discipline; compensation and performance; social responsibility; and governance in non-bank financial institutions. Only through this kind of rigorous examination can one hope to implement the financial reforms necessary and sufficient to reduce the likelihood and severity of future crises.
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Chapter 29: Governance and Microfinance Institutions

Rients Galema, Robert Lensink and Roy Mersland


Rients Galema, Robert Lensink and Roy Mersland 29.1 INTRODUCTION Since the mid-1990s, much has been written on microfinance (e.g., see for recent overviews Hermes and Lensink, 2007, 2011; Armendáriz and Morduch, 2010). The literature on microfinance is diverse. It includes theoretical studies on the design of optimal contracts and, more recently, the testing of these theories through randomized control experiments. It also includes impact studies that try to find out whether microfinance measurably improves the lives of the poor. Finally, there are macro studies that study how microfinance institutions (MFIs) are affected by the macroeconomic environment in which they operate and how they trade off outreach and financial sustainability. Yet, comparatively little has been written on the corporate governance of MFIs; most of the existing studies on MFI governance consist of consultancy reports that assume that MFIs are comparable to regular commercial firms (Labie and Mersland, 2011). The lack of scientific studies on microfinance governance is unfortunate, because a number of recent MFI failures have been attributed to bad governance systems. Until recently, researchers and policymakers considered microcredit as an important instrument to lift poor people, especially women, out of poverty. An enormous amount of anecdotes and simple empirical analyses support the positive view on microcredit. Policymakers became almost euphoric about the possible role of microfinance as a development instrument after Mohammad Yunus received the Nobel Peace Prize in 2006. Yet, recently the rosy view of microfinance has started to come to an end, especially after stories about loan-shark-style...

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