Challenge of Governance in Financial Organizations

Financial Organizations (FOs) have businesses which involve assets comprising primarily of financial rights obtained through lending, financial investments or related contracts. The quality of these assets is determined by the strength of these rights, which in turn depends on the kind of diligence that has been performed at the time of originating these assets. Microfinance Institutions (MFIs), being niche financial organizations, have assets comprising primarily of loans given to low income clients. An important factor that the quality of these assets depends on is the quality of loan appraisals, and importantly lending based on accurate of assessment of cashflows of potential clients to service debt. 

The liabilities of FOs, similar to any other organization, comprise of borrowings, notes, debentures. Most often these organizations enjoy very high leverage. Thus, on the one hand their assets are exposed to financial risks, on the other the leverage they enjoy leads to a situation where a major proportion of their assets are funded by borrowings from a variety of sources, including public money.

Consequently it becomes important that decision making at the highest levels of such organizations ensure that asset origination practices are prudent and in line with the long term interest of all stakeholders, particularly those who do not have a say in the organization’s management. Given that there are many stakeholders with diverse interests, the challenge of Governance in FOs is to find optimal balance, taking into account the expectations and concerns of all stake holders.