The microfinance sector merits a specific governance framework when examined from a theoretical perspective. Traditional firms use governance/ corporate governance to mitigate agency costs through monitoring of agents by the principals or other third party reputational intermediaries. In view of the inability of the agency cost approach to address the relationship between financial sustainability and social goals, governance issues in the microfinance industry must be subjected to a different set of parameters that effectively aim at the core of that relationship.

Discussion of Mersland and Strom (2009) regarding external and internal governance mechanism/ parameters can be translated into a three-dimensional approach described below. This approach will cover various constituencies within the sector from a governance standpoint.

Vertical Dimension: between the MFI and its providers of capital, which include shareholders, financiers, and employees;

Horizontal Dimension: between the MFI and its customers and the communities that are affected by it; and

External Dimension: focusing on the market for product competition and the role of the state in regulating the sector.