Bank requirements and governance in microfinance institutions in Tanzania and Kenya

Abstract

This (2015) paper explores measures used by banks to monitor and control Microfinance Institutions (MFI)s-partners in addition to assessing MFI governance-related reactions to bank requirements in Kenya and Tanzania. As suppliers of wholesale commercial funds to MFIs for on-lending to their clients, banks are key stakeholders to MFIs. According to the agency theory, banks influence MFIs’ operations. However, empirical knowledge on measures they apply to control MFIs’ operations and MFI governance related reactions to bank requirements is scant.The paper utilizes data collected through in-depth interviews held with the management of five banks selected using purposive sampling and eleven MFIs linked to the five banks in Tanzania and Kenya. The findings reveal that measures applied by banks to monitor and control MFIs-partners include accessing and investing in information about MFIs-partners and their clients, requiring guarantee and forced savings. Compliance with these measures was found to result into three governance-related reactions: improved compliance to own institutions and government regulations; realignment and/or abandonment of own institutions to accommodate bank requirements.