The Governance Issue in Microfinance Cooperatives: An enrichment from past experience in the north

Microfinance cooperatives are important actors in social economy, cooperative and microfinance sectors (Magill 1994, Jacquier 1999, Armendariz and Morduch 2005). According to the World Council of Credit Unions (WOCCU), in 2007 for Africa, Asia and Latin America, there were 36,523 financial cooperatives serving more than 63 million members (WOCCU statistics 2007). But, as for the current global crisis, their main issue is the challenge of good governance.

The development of microfinance cooperatives in the south was a heritage of the colonial period (Fournier and Ouedraogo 1996, Develtere, Pollet and Wanyama 2008). Thus, built on the same model, microfinance cooperatives can learn from the successes and failures of more than one century of European and North American financial cooperatives (FCs). Consequently, in this article, we decide to analyse governance of microfinance cooperatives, one of their most important issues, in light of experience in the north.

Indeed, microfinance cooperatives (like northern FCs at their beginning) have important comparative advantages especially thanks to their ability to benefit from more information on their clients and from efficient, inexpensive economic and social sanctions in case of default (Prinz 2002, Guinnane 2001). Their clients are also member-owners and the presence of social capital is quite high; these features reduce asymmetric information problems. Nevertheless, many authors have stressed governance as the principal weakness of microfinance cooperatives (Branch and Baker 2000, Cornforth 2004 and Cuevas and Fischer 2006, Hirschland and al. 2008)). Their democratic principle for decision-making, their extremely diffuse ownership (due to the “one member – one vote” rule) and the usually weak ability of their members, generally from rural areas and illiterate, to assure effective control make corporate governance a fairly touchy issue for financial cooperatives, even more so when they enter into growth dynamics. To tackle this issue, different governance mechanisms are active in order to preserve good governance. The relative importance of the different types of mechanisms can differ from one FC to another and is likely to evolve with the development of the organisation.

In this article, we compare the different governance mechanisms that were present in German FCs before the First World War with those acting in West African FCs. To proceed to this comparative analysis, we use Charreaux’s theoretical framework to identify and compare internal (such as different governance body, status or treasurer‘s remuneration design) and external (especially regulation, cooperatives law and State supervision) mechanisms as well as intentionally set up mechanisms and those working spontaneously (mutual control, ethics, social capital). The choice of the cases studied is justified by the fact that the German financial cooperative movement is one of the oldest and most important in Europe and financial cooperatives are the dominant type of microfinance institution in West Africa.

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