Corporate Governance of the Deposit Taking Microfinance Institutions (MFIs) in Ethiopia

This study examines regulatory features that affect MFI governance in Ethiopia. It assesses performance of MFIs' board of directors and executive management, and studies the outcomes and challenges of MFI governance in Ethiopia. Effective governance in Ethiopia is a prerequisite for MFI growth. It requires prudential regulation, developed systems and procedures, and sufficiently empowered board and management. MFIs in Ethiopia face unique operational risks that make prudential regulation challenging. These include:

• Ownership and governance risk;
• Risk of political, donor and NGO interference;
• Over emphasis on social objectives;
• Absence of property collateral, which increases portfolio risk;
• Weak MIS and lack of adequate professional experience.

Prudential regulation in Ethiopia has given MFIs the basic guidelines to ensure effective governance. However, there is a need to build the capacity of the National Bank of Ethiopia to implement the regulatory framework and enforce accountability of the board and management of MFIs. Prudential norms and regulatory framework should be regularly reviewed to fit dynamic MFI growth and improve governance.