Business Magazine

Can Microfinance Ignite a Good Governance Epidemic?

Posted on the 13 April 2011 by Center For International Private Enterprise @CIPEglobal

Can microfinance ignite a good governance epidemic?

Afghan people walk past a Kabul Bank branch in Kabul, September 14, 2010. (Photo: Reuters/Andrew Biraj)

In The Tipping Point, Malcolm Gladwell called them ‘connectors’. The growth of social media has popularized the established marketing term for them: influencers. They’re the highly connected hubs in any network that play a key role in spreading information, ideas, practices, and even diseases. Banks, for example, are economic hubs. If only they took that role more seriously.

This week the Afghan government announced it is dissolving Kabul Bank, the country’s largest and the government’s sole financial services provider, because Kabul Bank executives and board members were using savings deposits as a personal slush fund rather than extending loans and credit on a commercial basis. Kabul Bank officials disbursed $850 million in fraudulent loans to major shareholders and political allies, representing 94 percent of all Kabul Bank lending, The Wall Street Journal reported.

If you think that sounds terrible consider China’s estimated $1.2 trillion loaned to local state-owned enterprises for mostly political rather than commercial purposes. Seeking ways to save, lend and seek investors more efficiently, China’s burgeoning middle class is creating a massive shadow financial sector, according to a recent Financial Times report.

In the United States, the subprime mortgage crisis continues with no end in sight, as banks recently began to unravel the mortgage bundles underlying the asset-backed securities at the heart of the crisis. In order to satisfy court procedures for repossession, banks have been submitting forged materials from factory-style document farms, as reported recently on 60 Minutes.

With such economic hubs at their core, whether in Afghanistan or China or elsewhere, it’s no wonder that corruption – by anyone’s definition – seems so intractable. But the story of banks as economic hubs doesn’t always have to be a tragedy. In the aftermath of the East Asian Financial Crisis in 1997, one financial sub-sector realized the importance of taking their hub status seriously: development finance institutions.

Created after World War II, development finance institutions in East Asia started out as channels for administering reconstruction loans and overseeing project management. Though they’ve since evolved in different ways to fund nascent and growing economic sectors ahead of other investors, development finance institutions remain heavily involved in improving client management and governance.

After the 1997 East Asian Financial Crisis, development finance institutions in East Asia knew that they needed to restore investor confidence and get economies back on the market-oriented growth path that has reduced more poverty than in any other region in the world. Led by the Association of Development Finance Institutions in Asia and the Pacific (ADFIAP), their collective response was to strengthen corporate governance in the region, starting with themselves.

With a collectively-built corporate governance rating system, region-specific training materials and the ADFIAP-housed Institute for Development Financing to support and conduct regular risk management and governance seminars for staff and board members (more info on, development finance institutions got themselves on track to strengthen corporate governance in the region by serving as the standard to which they held their client networks accountable.

Can microfinance providers follow in those footsteps? Though not inclusive of all microfinance providers, there are about $26.9 billion in deposits and $65 billion in loans on the balance sheets of the 1,933 microfinance institutions reporting to the Microfinance Information Exchange as of writing this post – and those numbers have been growing about 20 percent a year. Microfinance providers are thus emerging as new economic hubs.

By serving as examples of effective corporate governance, microfinance providers could succeed where so many financial institutions have repeatedly failed, and in so doing could ‘infect’ their client and community networks with the ‘disease’ of strong corporate governance. With almost three billion unbanked people still to reach, those are huge potential networks to infect.

Such an epidemic would be good for reducing poverty, as it would serve to attract investment into new and growing businesses. It would be good for financial sectors around the world trying to end the succession of financial scandals and crises. It also would be good for new or struggling democratic states, once more transparent financial sectors within countries take over development financing from international institutions. Microfinance providers could ignite that epidemic.

For a deeper look at corporate governance and microfinance, check out “Corporate Governance, Scale, and Financial Inclusion,” by Oscar Abello for CIPE’s Economic Reform Feature Service.

You Might Also Like :

Back to Featured Articles on Logo Paperblog

These articles might interest you :

  • Easy Breezy Summertime Looks

    Easy Breezy Summertime Looks

    Mid-Atlantic states are notoriously known for their humid weather in the summer. They rival the swamplands of Florida. The saying, "it's not the heat, it's th... Read more

    7 hours ago by   Bridgetteraes
  • The Xroadie Files

    Xroadie Files

    Revbjelde – Severance Mordecai Smyth – Mellotron, Andy Prince – Chapman Stick, Guest Musicians Severance slow melodic sounds that just seem to work... Read more

    11 hours ago by   Ripplemusic
  • Trump and Putin Might Have Thought Helsinki Summit Was Private, but...

    Trump Putin Might Have Thought Helsinki Summit Private, Intelligence Agencies from Finland Sweden Likely Reported Almost Real Time

    Donald Trump and Vladimir Putin might have thought their meeting in Helsinki yesterday was virtually private, but that almost certainly was not the case, report... Read more

    11 hours, 21 minutes ago by   Rogershuler
  • Learn the Language of Your Brows "Browmoticons" | Happy Brows

    Learn Language Your Brows "Browmoticons" Happy

    Brows speak volumes about yourself, you can communicate with other people without even speaking with just using your eyebrows. A subtle arch can reflect your... Read more

    11 hours, 53 minutes ago by   Rayrose Camille Samson
  • Wildacres Report

    Wildacres Report

    That was the week that was. About a hundred writers convene on the mountain for a week of workshops, music, partying, and quite a lot of silliness. Read more

    12 hours, 30 minutes ago by   Vickilane
  • Ultra-gorgeous Gala Montenapoleone Trunk Show and Bridal Party

    Ultra-gorgeous Gala Montenapoleone Trunk Show Bridal Party

    Love4Weddings Love4Weddings - A Stylish Wedding Blog Σήμερα, σας παρέχουμε μια μικρή γεύση από το ονειρικό trunk show του οίκου Gala Montenapoleane και του... Read more

    13 hours, 30 minutes ago by   Love4weddings
  • The Ultimate Romantic Wedding Inspiration | Love4Weddings Bridal Party

    Ultimate Romantic Wedding Inspiration Love4Weddings Bridal Party

    Love4Weddings Love4Weddings - A Stylish Wedding Blog Σε αποχρώσεις του απαλού ροζ και του αστραφτερού χρυσού, στολίστηκε ο υπέροχος εσωτερικός χώρος του... Read more

    13 hours, 30 minutes ago by   Love4weddings