Independent directors to be appointed in microcredit NGOs

Until now, large microcredit organisations or NGOs such as BRAC, ASA, TMSS, BURO Bangladesh, and Uddipan have been run entirely by their own governing boards. The government now plans to introduce a provision to appoint two independent directors in each of these NGOs.

Currently, the boards of directors of microcredit institutions have 5 to 10 members. Under the new provision, it will become mandatory to include two independent directors.

The board of directors makes policy decisions for an organisation. Banks and financial institutions in the country already have the provision for appointing independent directors, who receive a monthly honorarium of Tk 50,000 and Tk 10,000 for attending each meeting. However, questions remain about how effectively they have prevented irregularities and corruption in banking. In many cases, independent directors themselves have become complicit in such irregularities.

So far, there has been no provision for independent directors in microcredit institutions. Once this new initiative is implemented, it will be the first time that independent directors are appointed in microcredit organisations, which are often referred to as NGOs but are technically microfinance institutions (MFIs). These institutions are regulated by the Microcredit Regulatory Authority (MRA), which operates under the Financial Institutions Division of the Ministry of Finance, with the Governor of Bangladesh Bank serving as its chairman.

According to MRA sources, the authority has nearly finalised a draft law and regulation containing the requirement for appointing independent directors, along with other provisions. The draft mainly focuses on enhancing the powers of the MRA and tightening control over microcredit institutions. Reportedly, Finance Adviser Salehuddin Ahmed has approved this initiative.

Salehuddin Ahmed, who is currently in the United States to attend the annual meetings of the World Bank and the International Monetary Fund (IMF), told Prothom Alo in a text message last night that he could not comment on the matter at this moment, as he first needs to learn about the recent discussions between MRA and the microcredit institutions.

Former caretaker government adviser Hossain Zillur Rahman, however, told Prothom Alo that such a proposal was prepared without understanding the ground realities. He warned that this would lead to greater government interference in microcredit institutions and could disrupt their natural working environment.

As of June 2024, the MRA has registered 724 microcredit institutions with a total of 41.5 million clients and 223,000 employees. These institutions have disbursed Tk 2.62 trillion in loans, with a very low rate of non-performing loans.

According to the draft regulation, independent directors will be required only in medium and large institutions, meaning those with a loan portfolio exceeding Tk 500 million. The MRA does not have an exact figure for how many institutions meet that threshold, but officials estimate that around 100 institutions may fall into this category.

The MRA proposes that each microcredit institution will nominate four candidates for the two independent director positions, from which the MRA will issue a no-objection letter for two. However, several conditions apply — for example, no individual with a parent, sibling, child, or spouse relationship to any existing board member can be appointed as an independent director.

Asked why such an initiative was being taken, MRA Executive Vice Chairman Mohammad Helal Uddin told Prothom Alo that the MRA board had introduced a few measures to bring discipline to the microcredit sector, and the appointment of independent directors was one of them.

He clarified that the institutions themselves would appoint the independent directors, while the MRA would only set the rules and guidelines through consultation. “If an institution repeatedly proposes unqualified candidates, the government will then be compelled to make the appointments. The question of government interference is irrelevant here,” he said.

Professor Helal added that a form of familial control has emerged in the microcredit sector, similar to what exists in banks. The government has exempted this sector from taxes to support the welfare of marginalised people. But in many institutions, some individuals are taking undue benefits. This cannot continue, he said.

The Credit and Development Forum (CDF), the only networking organisation for microfinance institutions, has objected to the MRA’s initiative, calling it “harmful, illegal, and unnecessary.” In a letter sent to Finance Adviser Salehuddin Ahmed on 6 October, the forum requested his intervention.

Meanwhile, another organisation, the International Network of Alternative Financial Institutions (INAFI) — a coalition of microcredit NGOs — has separately appealed to MRA Executive Vice Chairman Mohammad Helal Uddin not to implement the initiative exactly as proposed.

Asif Saleh, Executive Director of BRAC, a member of INAFI, told Prothom Alo, “In the process of trying to regulate a few institutions, the MRA’s proposed conditions for independent director appointments and CEO approvals could have disastrous consequences. How can we be sure these independent director posts won’t be politically misused? We’ve seen how destructive the system has been in the banking sector. Such a move could be a bad omen for a sector that has so far remained healthy.”

According to the draft regulation, to qualify as an independent director, one must have at least 10 years of experience in a first-class government, autonomous, statutory, or self-governed organisation. Preference will be given to those with experience in the financial sector. The age requirement will be between 35 and 70 years, and a person cannot serve as an independent director for more than one microcredit institution at a time.

Experts note that this effectively opens the door for retired bureaucrats to join the boards of microcredit organisations, creating a post-retirement placement opportunity. They also point out that government officials have long been present on the boards of state-owned banks but have failed to prevent financial irregularities—and in some cases, have been accused of benefiting from them.

The MRA, however, states that anyone convicted of a criminal offense, involved in fraud or financial crime, or declared a loan defaulter personally or through an affiliated organisation cannot be appointed as an independent director. Attendance of independent directors in board meetings will be mandatory. They will be appointed for the current tenure of the board, but the MRA may extend their appointment for one additional term.

INAFI argues that board members of microcredit institutions, who are elected by general members, are already independent. Imposing additional independent directors could undermine the sector’s non-political character. It warned that such appointments might invite political influence and lobbying—including pressures for jobs, vehicle use, personal perks, or placing deposits in preferred banks.

CDF Chairman and POPI Executive Secretary Murshed Alam Sarkar told Prothom Alo, “What we need are policies that encourage institutional entrepreneurship, not legal shackles.”

Under the existing MRA Act of 2006, each microcredit institution’s board appoints a chief executive officer (CEO) or executive director (ED). The new regulation adds that institutions must obtain an MRA no-objection certificate within one month of such appointments.

Additionally, no one under 40 may be appointed CEO, and those who reach 65 years of age must retire. The CEO or ED will serve a five-year term, renewable upon reappointment. During the tenure, the CEO cannot engage in any other business or profession, and no family members may serve on the same board.

To qualify, the candidate must have at least 15 years of experience, including five years in a managerial position in a microcredit or financial institution, and must hold a postgraduate degree from a recognised university. Advanced degrees in economics, accounting, finance, banking, management, or business administration will be considered an added qualification. There are currently no such requirements, and CEOs may serve until the age of 65, while founders may remain until 75, if physically fit.

In written feedback to the Finance Adviser, the CDF stated that requiring an MRA no-objection for CEO appointments is unreasonable, and that a bachelor’s degree should be sufficient instead of a postgraduate one.

Last night, MRA Executive Vice Chairman Mohammad Helal Uddin claimed that microcredit institutions have agreed to all provisions except those concerning independent directors. However, several NGOs told Prothom Alo that they did not agree on all issues.

Directors of microcredit institutions do not receive profit shares and are not owners of the institutions, whereas bank directors (excluding independents) are typically owners who share profits. Microcredit institutions also cannot collect deposits from the public, unlike banks, which rely on depositors’ money.

Microcredit leaders argue that the MRA is wrongly equating NGOs with banks in terms of ownership and management by introducing the independent director system.

Transparency International Bangladesh (TIB) Executive Director Iftekharuzzaman told Prothom Alo, the unique nature of microcredit institutions must not be undermined. At the same time, these organisations need good governance, accountability, and transparency. Like other sectors, this one too faces irregularities, so stronger punitive measures are necessary. But considering that the independent director model has failed in the banking sector, its effectiveness in microcredit institutions is highly questionable.

He added that appointing independent directors could, in the long run, open the door to partisan political and bureaucratic influence, creating an unhealthy competition for control over the sector.