Can the draft regulation make the microfinance sector stronger?

For many years, leading microfinance institutions (MFIs) and non-governmental organisations (NGOs) have been managed through their respective boards of directors. These boards, usually comprising five to ten members, have long operated with relative autonomy. However, the government is now preparing to introduce a new regulation requiring every medium and large MFIs to include two independent directors on their boards, which is a significant shift in the governance structure of the microfinance sector.

Although the inclusion of independent directors has long been common in banks and other financial institutions, this will be the first such initiative in this industry. The Microcredit Regulatory Authority (MRA), a government body under the Financial Institutions Division of the Ministry of Finance, has reportedly almost finalised the draft of this regulation. The proposed provision aims to enhance transparency, strengthen MRA's supervisory authority, and establish greater discipline in the sector.

According to the draft, only institutions with outstanding loan portfolios exceeding Tk 50 crore will be required to appoint independent directors. It is estimated that about 100 institutions in Bangladesh will fall under this category. Each will propose four candidates, from which the MRA will approve two. To prevent conflicts of interest, close relatives of existing board members will not be eligible. Independent directors must be between 35 and 70 years old, possess at least 10 years of senior-level experience in a government or autonomous body, and preferably have a financial background. Furthermore, no individual may serve as an independent director in more than one MFI at a time.

While the MRA asserts that the initiative will promote good governance and help curb nepotism, critics warn that it could open the door to political influence and excessive control. Many fear a repeat of the bureaucratic culture and political appointments that have plagued state-owned banks, leading to weak governance and corruption. Associations within the microfinance sector argue that such regulation could undermine the independent, community-driven model that has made Bangladesh's microfinance system a global example of financial inclusion.

The MRA, however, has clarified that the process will remain institution-driven: MFIs will nominate candidates, and the authority will ensure compliance and transparency. Alongside this move, the MRA has also proposed new requirements for appointing chief executive officers (CEOs) or executive directors. Institutions must obtain MRA approval within one month of appointing a new CEO, who must be between 40 and 65 years old, have at least 15 years of relevant experience, including five in a managerial role, and hold a postgraduate degree. The CEO's tenure will be five years, renewable upon reappointment.

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While the government's goal is to enhance accountability, much will depend on effective implementation. The real challenge will be maintaining a balance where oversight is strengthened without compromising the sector's innovative and autonomous nature.

Across the world, microfinance institutions and similar organisations operate under governance frameworks that ensure both accountability and independence. Typically, boards include executive, non-executive, and independent members with no conflicts of interest. They oversee specialised committees—such as audit, risk, nomination, and remuneration committees—that monitor specific areas of operation. Clear rules define director appointments, tenure, age limits, and reappointments. Day-to-day operations are managed by a CEO or managing director (MD), who reports directly to the board. The clear separation between governance and oversight is a hallmark of strong institutions. Most MFIs are also regulated by a central bank or financial regulator, which ensures licensing, financial reporting, and compliance.

Comparative studies on MFIs in Bangladesh, Nepal, and Malaysia show that sustainability depends on strong internal audit mechanisms, competent boards, adherence to the rule of law, and independent oversight. These factors are now widely recognised as essential components of sound governance and long-term institutional stability.

In countries with more advanced financial systems, governance structures are even more detailed. The definition of independence is clearer, directors' tenure limits are set, and each committee must include at least one independent member. To promote transparency, institutions must disclose directors' qualifications, meeting attendance, and remuneration. In many organisations, the roles of CEO and board chair are deliberately separated to prevent concentration of power. Boards are also subject to regular performance evaluations, often conducted by external reviewers. Strong regulatory supervision and capital adequacy requirements further reinforce financial stability and public confidence.

Ultimately, Bangladesh's proposed reforms align with international best practices, but their success will depend on fair, consistent implementation. Genuine good governance will be achieved only when these reforms enhance transparency, accountability, and credibility, while preserving the independence and community-based spirit that have long made Bangladesh's microfinance sector a global model for inclusive finance.

Nafew Sajed Joy has a master's degree in social sciences from Dhaka University. He can be reached at [email protected].

Views expressed in this article are the author's own. 

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