In both the 2008 and 2009 Microfinance Banana Skins reports, corporate governance was ranked as one of the topmost pressing risks facing the sector. The Banking Banana Skins report 2012 also recognised the need of stronger governance and risk management practices. Key industry players including regulators, donors and investors highlighted the need for appropriate governance structures and processes. This Note addresses the most common challenges faced by small to mid-size rural banks in Indonesia and highlights possible solutions. It concludes that for a small to mid-size rural banks and MFIs good governance can establish the right long-term foundation (guiding principles, vision, mission and so on) to ensure that the institution stays on track to achieve its business and social goals. Rural banks and MFIs face increasing governance challenges to address issues such as rapid growth, sustainability and formalisation. Without a governance structure designed so that the institution’s stakeholders (board of directors, managers, owners, regulatory authorities, etc.) can adequately oversee the effective management of the institution, financial solvency and long-term sustainability will be at risk. Establishing a good governance system requires an appropriate combination of board members and their full participation. Promoters, governing board members and the chief functionary have to work in collaborative coordination to ensure effective governance.

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