Good Money’ Chasing ‘Bad Money’: Implications for MFIs Management and Governance in Ghana – Systemic Risks

Another side of the coin is that the influence of management and board of directors may generate bad loans because loan officers are sometimes not given the opportunity to appraise loan applications well before approval. Management and the board have the responsibility for ensuring that the goals of the MFIs are achieved and also depositors’ interest is protected. The fundamental goal is to contribute to institutional sustainability and one way of ensuring this is to ensure that there is high repayment rate. This involves reaching out to more clients and economically active population strata, the so-called main outreach ‘frontier’ of microfinance (Helms, 2006; Johnson et al., 2006). Secondly, there is the need to achieve financial sustainability, preferably independence from donors. While Rhyne considers these two main goal areas to be a ‘win-win’ situation, claiming that those MFIs that follow the principles of good banking will also be those that alleviate the most poverty. Reading here
Woller et al. and Morduch believe that the proposition is far more complicated. This is because in most cases management and the board influence the loan application processes thus creating more outstanding loans which directly affect the achievement of MFIs objectives. It is important however to recognize that the theory of corporate governance is based on the assumption that the objective of firm is to maximize the market value of the company’s wealth translated into shareholders’ wealth maximization. In this regard the onus is on board to discharge good internal governance strategies to achieve this.
The role of internal corporate governance in microfinance cannot be underestimated. Corporate governance is concerned with ways in which all parties in the well-being of the firm attempt to ensure that managers and other stakeholders take measures or adopt mechanisms that safeguard the interests of the stake holders. Such measures are necessitated by the separation of ownership from management, an increasing vital feature of the modern firm (Sanda, Mikailu & Garba, 2005). The corporate governance procedures and the actions of the board members should be such that they create accountability and enable the stakeholders to trust one another. Governance gives shareholders confidence that managers are being supervised. It creates checks to prevent management from serving its own interests. Governance engenders trust that allows a financial institution to attract depositors and investors. Governance provides assurance to government officials and, in the case of financial institutions, to bank superintendents. In these directions it is the responsibility of the board and management to ensure that loan portfolios do not go bad to the detriment of equity holders. More often than not, MFIs do not have proper governance structures to ensure this and as a result many MFIs unfold causing high level of systemic risks.
In Ghana the issue of using ‘good money’ to chase ‘bad money’ has not been recognized by researchers in the microfinance sub-sector. In most cases attention has been focused on why clients default and constraints in assessing credit from the formal financial institutions. It must be emphasized however that the use of good money to chase bad money is of critical implications for MFIs in Ghana. The issue of whether it is profitable to use good money to chase bad or not has not also been dealt in the Ghanaian microfinance landscape.