Improving The Governance of Compensation in MFIs

By Ramesh S Arunachalam , Rural Finance Practitioner

There has been so much of controversy regarding the governance of compensation in MFIs, especially during the last few months. I had posted my observations – a few days ago – with regard to remuneration issues at various MFIs in India. In this post, I try and look at how the governance of compensation at MFIs can (perhaps) be improved in practice…This is something that we stakeholders (bankers, investors, technical support personnel, raters and others including MFI associations and regulators perhaps) – in the Indian micro-finance industry – could look towards achieving…in our own little ways…as part of our work with MFIs.

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Here are some practical things that we could try and implement on the ground…to ensure that the process in governance of compensation at MFIs becomes transparent and is perceived to be fair…

1.   Boards Must Play Proactive Role in Governance of Compensation at MFIs and Compensation System Must Not Be In Grip Of The CEO/Senior Management:First, boards of MFIs can and must play a proactive role in establishing proper governance of remuneration and that is where the buck actually stops…It naturally follows that the board must also ensure that this compensation system is notprimarily controlled by the chief executive officer and/or other members of the senior management team (chief operating officer, chief finance officer etc).

In fact, the above has been a major problem with some of the MFIs in India – here,the compensation system, which was firmly in the grip of the CEO and/or senior management team, witnessed non-transparent actions, related party transactions and whimsical payouts to CEO/Senior Management, without sufficient rationale or justification. In fact, I see these happenings as a major catalyst for the present micro-finance crisis in Andhra Pradesh and India as, at the concerned MFIs, many of the (compensation) decisions were laden with significant conflict of interest…and they are really questionable from a legal as well ethical standpoint…

Key Questions (Not exhaustive) For Various Stakeholders: Therefore, it is in our interest, as an industry stakeholder to ask relevant questions as part of our day-to-day work in the micro-finance industry and some of the key questions are given below:

  1. Are the board of directors effectively taking overall responsibility for the MFI compensation system, including by participating directly in the design and operation of this system?
  2. Has the board ensured that the CEO and/or senior management team at the MFI are NOT in control of the compensation system?
  3. Is the compensation policy aligned with the risk management framework of the MFI?
  4. Have the board of directors at the MFI approved and periodically reviewed the compensation policy?
  5. Has the board ensured that the compensation policy at the MFI does NOT provide incentives for excessive risk-taking?

Read the rest on the Microfinance In India Blog

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