Good Money’ Chasing ‘Bad Money’: Implications for MFIs Management and Governance in Ghana – Implications for management and board of directors

Even though loan officers are supposed to be independent, are they allowed to be seen so? They might be independent in theory but not in practice. In almost all the MFIs there is board involvement in loan processes apart from the usual board meetings to discuss the approval or otherwise of certain loan thresholds. Two institutions believe that there is somehow board involvement. In the same way, four institutions indicate that management influence is common in loan processes where in some cases there is some level of partial involvement (somehow) by management personnel. In almost all the institutions loan officers seem to be independent but their independence is undermined by board and management involvement.
In almost all the MFIs interviewed, there is no code of ethics for directors and managers with regards to loans. We are not sure if such a document exists elsewhere but ideally there should be such a document to guide the board and management on loans. This probably has given chance to some board members and CEOs to do what they are not supposed to do creating serious conflict of interest.
In the face of the proposed regulatory guidelines for MFIs in Ghana (BG/GOV/SEC/2011/04), there is a strong need to protect the interest of depositors. This stems from the fact that any loose structures in granting loans to otherwise incredible clients will mean some depositors losing their hard earned money. To safeguard the interest of the poor depositor there is the need for proper internal governance. This will ensure the avoidance of agency cost. Bad loans have the potential for generating high agency cost in that management, board or employees may pursue a selfish objective at the expense of owners of the resources since the core asset of banking is the protection of the loan portfolio. The finding is consistent with Chaffai, Dietsch and Godlewsky that the when owners are not able to exercise control over management, the latter will pursue actions to their advantage.
Management and staff involvement in loan disbursement that generates bad loans are sometimes subject to sanctions such as firing, repayment by the personnel involved, forfeiture of all employment benefits, and sometimes police arrest of the personnel involved. The implication is that the personnel whose involvement causes liability to the institution is held severally and jointly liable with the client. The board quickly meets to take any appropriate decisions to sanction the offenders. Unfortunately, when a board member is involved in causing liability, management is unable to take any such actions against the board member because the board members are able to influence shareholders to retain them. In most cases where the board chairman is in close contact with the CEO, the situation becomes different. The two team up to retain their positions in order to gain their selfish interests at the cost of shareholders. Board influence in loan application and disbursement process comes in different forms. A board member may encourage a close friend or relative to apply for loan. The board member then makes a follow-up to ensure that the loan officer recommends the application for consideration either by the CEO or the board depending on the loan threshold. In some cases, the CEO directly influences loan officers and compel them to approve some loans. The implication is that, in MFIs, most board members play the diffused role by engaging themselves in the operation of the MFIs. Another implication is that in most cases the MFI was started as sole proprietor (by the CEO) and latter became public thus giving the CEO the greater control in the institution. Even after going public, the spirit of the sole proprietorship is can still be seen in the CEO.