Can the draft regulation make the microfinance sector stronger? – The Daily Star

Report on Governance Reforms in Bangladesh’s Microfinance Sector and Alignment with Sustainable Development Goals

Introduction: Strengthening Institutions for Sustainable Development

A new regulatory proposal in Bangladesh aims to reform the governance structure of the microfinance sector by mandating the appointment of independent directors to the boards of medium and large Microfinance Institutions (MFIs). This initiative represents a significant step towards enhancing institutional integrity, directly aligning with Sustainable Development Goal 16 (Peace, Justice and Strong Institutions). By improving transparency and accountability, the reform seeks to fortify the sector’s capacity to contribute effectively to broader development objectives, including SDG 1 (No Poverty), SDG 5 (Gender Equality), and SDG 8 (Decent Work and Economic Growth).

Proposed Regulatory Framework and Its Link to SDG 16

Core Objective: Enhancing Transparency and Accountability

The Microcredit Regulatory Authority (MRA) has drafted a regulation to introduce independent directors, a common practice in the banking sector but a first for microfinance. The primary goal is to establish stronger governance mechanisms, which are fundamental to building the effective, accountable, and inclusive institutions called for in SDG 16. The key aims of the provision are:

• To enhance transparency in MFI operations.
• To strengthen the supervisory authority of the MRA.
• To instill greater discipline across the sector.

Scope and Implementation Details

The proposed regulation outlines a structured process for appointing independent directors, targeting institutions with the most significant impact on financial inclusion and poverty alleviation.

1. Applicability: The mandate will apply to approximately 100 institutions with outstanding loan portfolios exceeding Tk 50 crore.
2. Appointment Process: Each eligible MFI will nominate four candidates, from which the MRA will approve two to serve as independent directors.
3. Eligibility Criteria: To ensure impartiality and expertise, the criteria for independent directors are clearly defined.
   • Age must be between 35 and 70 years.
   • A minimum of 10 years of senior-level experience in a government or autonomous body is required.
   • A background in finance is preferred.
   • Close relatives of existing board members are ineligible to prevent conflicts of interest.
   • An individual cannot serve as an independent director on more than one MFI board simultaneously.

In parallel, the MRA has proposed new appointment and tenure rules for Chief Executive Officers (CEOs) to further professionalise leadership and ensure institutional stability, reinforcing the objectives of SDG 16.

Implications for Achieving Sustainable Development Goals

Strengthening MFI Contributions to SDGs 1, 5, 8, and 10

Effective governance is critical for the long-term sustainability of MFIs and their ability to achieve their social missions. By promoting sound management, the new regulation can enhance the sector’s impact on several SDGs:

• SDG 1 (No Poverty) & SDG 10 (Reduced Inequalities): Improved oversight can ensure that financial products are designed and delivered effectively to the poorest and most marginalised communities, advancing financial inclusion.
• SDG 5 (Gender Equality): With stronger governance, MFIs can better track and improve their outreach to women, who are primary clients, thereby promoting female economic empowerment.
• SDG 8 (Decent Work and Economic Growth): Accountable institutions are better positioned to support local entrepreneurship and small business growth, contributing to sustainable economic development.

Potential Risks to Sectoral Autonomy and Effectiveness

While the reforms are aligned with global best practices, concerns have been raised regarding their implementation. Critics fear that the regulation could introduce political influence and bureaucratic control, potentially undermining the community-driven, independent model that has made Bangladesh’s microfinance sector a global leader. Such an outcome would threaten the very institutional agility required to serve hard-to-reach populations and could compromise progress towards the SDGs.

Alignment with International Governance Standards

Global Best Practices for Institutional Integrity

The proposed reforms in Bangladesh reflect established international standards for corporate governance in financial institutions. Strong governance frameworks globally are recognised as essential for institutional stability and achieving development mandates. Common features include:

• A clear separation between board oversight and executive management.
• The presence of executive, non-executive, and independent directors to ensure diverse perspectives and prevent conflicts of interest.
• Specialised board committees (e.g., audit, risk, nomination) to monitor key operational areas.
• Regulatory supervision by a central authority to ensure compliance, financial stability, and public confidence.
• Transparent disclosure of director qualifications, remuneration, and meeting attendance.

Comparative studies confirm that MFI sustainability is directly linked to strong internal audits, competent boards, and independent oversight—all core components of the proposed reforms.

Conclusion: A Pathway to Stronger Institutions and Sustainable Impact

The initiative to mandate independent directors on MFI boards is a crucial step towards strengthening the governance architecture of Bangladesh’s microfinance sector. This reform is in direct support of SDG 16 and has the potential to amplify the sector’s contribution to poverty reduction, gender equality, and inclusive economic growth. However, its success is contingent upon a fair and transparent implementation process that balances enhanced oversight with the operational autonomy that has historically been the sector’s strength. Achieving this balance will be essential to ensure that MFIs remain credible, effective, and powerful partners in achieving the Sustainable Development Goals.

Analysis of Sustainable Development Goals in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 1: No Poverty

  The article focuses on microfinance institutions (MFIs), which are fundamental to poverty alleviation strategies. By providing financial services to low-income individuals, MFIs directly contribute to efforts to end poverty. The governance and stability of these institutions, as discussed in the article, are crucial for their long-term effectiveness in serving the poor.

• SDG 8: Decent Work and Economic Growth

  Microfinance promotes economic growth by enabling entrepreneurship and supporting small businesses, which in turn can create decent work. The article’s discussion on strengthening the governance of MFIs relates to ensuring the stability and sustainability of the financial sector that supports this grassroots economic activity.

• SDG 16: Peace, Justice and Strong Institutions

  This is the most central SDG in the article. The proposed regulation to add independent directors to MFI boards is a direct effort to build “effective, accountable and transparent institutions.” The article explicitly states the aims are to “enhance transparency,” “establish greater discipline,” “promote good governance,” and “curb nepotism,” all of which are core components of SDG 16.

2. What specific targets under those SDGs can be identified based on the article’s content?

1. Target 1.4: Access to financial services, including microfinance

   The article is entirely centered on the microfinance sector in Bangladesh. By discussing regulations for MFIs, it directly addresses the institutions responsible for providing the “financial services, including microfinance” mentioned in this target. The health and governance of these institutions are critical to ensuring continued and expanded access for the poor and vulnerable.

2. Target 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all

   The new government regulation is a measure designed to strengthen the capacity and governance of domestic financial institutions (MFIs). The article highlights that the goal is to improve their operational discipline and oversight, which aligns with strengthening their ability to provide sustainable financial services to a broader population.

3. Target 16.5: Substantially reduce corruption and bribery in all their forms

   The article explicitly mentions that one of the goals of the new regulation is to “curb nepotism.” It also notes that critics fear a repeat of the “corruption that have plagued state-owned banks.” The requirement for independent directors and the rules preventing conflicts of interest (e.g., “close relatives of existing board members will not be eligible”) are direct measures aimed at reducing opportunities for corruption.

4. Target 16.6: Develop effective, accountable and transparent institutions at all levels

   This is the most directly relevant target. The entire premise of the proposed regulation is to make MFIs more accountable and transparent. The article states the provision aims to “enhance transparency, strengthen MRA’s supervisory authority, and establish greater discipline in the sector.” The introduction of independent directors is a classic governance mechanism for achieving this target.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

Yes, several indicators are either directly mentioned or strongly implied:

• Proportion of MFIs with independent directors on their boards

  The article states the new regulation will require “every medium and large MFIs to include two independent directors on their boards.” Tracking the percentage of the approximately 100 eligible institutions that comply with this rule would be a direct indicator of progress towards Target 16.6.

• Existence of clear and enforced criteria for board and executive appointments

  The article details specific criteria for both independent directors and CEOs. For directors, these include age limits (35-70), experience (10 years), and rules against conflicts of interest. For CEOs, they include age (40-65), experience (15 years), and education (postgraduate degree). The adoption and enforcement of these rules serve as an indicator of institutional strengthening (Target 16.6).

• Implementation of governance best practices

  The article mentions international best practices such as the establishment of specialized committees (audit, risk, nomination), the separation of CEO and board chair roles, and regular performance evaluations for boards. The adoption of these practices by Bangladeshi MFIs would be an indicator of improved governance and accountability (Target 16.6).

• Scale of the domestic microfinance sector

  The article mentions that “about 100 institutions” have “outstanding loan portfolios exceeding Tk 50 crore.” The number of such institutions and the total value of their portfolios can serve as an implied indicator of the capacity of domestic financial institutions (Target 8.10) and the reach of microfinance services (Target 1.4).

4. Table of SDGs, Targets, and Indicators

Source: thedailystar.net