Effect of Corporate Governance on the Financial Performance (Sustainability) of Microfinance Institutions in Ethiopia

Authors

  • Ayenew Shibabaw Asmare Department of Accounting and Finance, Debre Markos University, Ethiopia, and Ph.D. Candidate at University Business School, Panjab University, Chandigarh, India
  • Naveen Kumar Asst. Professor, University Institute of Applied Management Sciences (UIAMS), Panjab University, Chandigarh, India

DOI:

https://doi.org/10.48165/gmj.2023.conf9

Keywords:

Microfinance, financial performance, Governance, internal and external factors

Abstract

This study investigated the relationship between the financialperformance and corporate governance of microfinance institutionsusing a sample of 25 MFIs from 2012 to 2021 with a balanced set ofpanel data. The study used secondary data and employed a descriptiveresearch design and a quantitative research approach. The empiricalresults showed that Female CEOs, Women directors, and internaauditors reporting directly to the board of directors and ProfitOrientation have a positive relationship and statistically significant effecton financial performance (ROA and OSS). The study recommendedas microfinance institutions should consider the gender diversity ofCEO and on the Board of directors and the board of directors also giveattention to internal auditors to report directly to them. Moreover, thestudy suggested for future researchers may be interested in validatingthe stability of the result and providing additional results for this studyby including other variables (Internal and external).

Downloads

Download data is not yet available.

References

Adams, R., & Mehran, H. (2003). Is bank-holding com-

pany governance different? Economic Policy Review

(1), 123–142.

Akben-Selcuk, E. (2016). Does Firm Age Affect

Profitability? Evidence from Turkey. International

Journal of Economic Sciences,5(3),1-9.

Akpan, E.O. (2015). Corporate board meetings and

companies performance: Empirical evidence from

Nigerian quoted companies. Global Journal of

Commerce & Management Perspective, 4(1), 75-42.

Aldamen, H., Duncan, K., Kelly, S., McNamara, R., &

Nagel, S. (2011). Audit committee characteristics and

firm performance during the global financial crisis.

Accounting and Finance, 52(4), 971–1000.

Al-Matari, Y. A., Al-Swidi, A. K., Fadzil, F. H. B., &

Al-Matari, E. M. (2012). Board of directors, audit

committee characteristics, and performance of Saudi

Arabia-listed companies. International Review of

Management and Marketing, 2(4), 241-251.

Amran, N.A. (2011). Corporate governance mechanisms

and company performance: Evidence from Malaysia

Company. International Review of Business Research

Papers, 7(6), 101-114.

Armendariz de, Aghion, B., & Morduch, J. (2005). The

economics of microfinance. Cambridge: MIT Press.

Ashari, S., & Krismiaji, K. (2019). Audit committee char-

acteristics and financial performance: Indonesian

evidence. Equity, 22(2), 139-152.

Bassem, B.S. (2008). The efficiency of microfinance insti-

tutions in the Mediterranean: An application of

DEA, Transition Studies Review 15(2), 343–354.

Bassem, B.S. (2009). Governance and performance of

microfinance institutions in Mediterranean coun-

tries: journal of business economics and Management,

(1), 31-43.

Bayeh, A. (2012). Financial Sustainability of Microfinance

Institutions (MFIs) in Ethiopia. European Journal of

Business and Management, 4(15), 1-11.

Bekana, D., & Mohammed, A. (2019). The Effect of

Corporate Governance Mechanism on the Financial

Performance of Microfinance Institutions: Evidence

from Ethiopian Microfinance Institutions. Research

Journal of Finance and Accounting, 10(21), 19-31.

Belete, Z. (2015). The impact of corporate Governance on

Microfinance Institutions Financial Performance in

Ethiopia. M.Sc Thesis. Addis Ababa University, Addis

Ababa.

Bhagat, S., & Bolton, B. (2008). Corporate governance

and firm performance. Journal of Corporate Finance,

(3), 257–273.

Bøhren, Ø., & Strøm, R. Ø. (2005). The value-creating

board: Theory and evidence. Research Report no.

/2005, BI, Norwegian School of Management, 1-62.

Brick, I. E., Palmon, O. & Wald, J. K. (2006). CEO com-

pensation, director compensation, and firm perfor-

mance: Evidence of cronyism? Journal of Corporate

Finance, 12(3), 403–423.

Cadbury, A. (2002). Corporate Governance and

Chairmanship: A Personal View, OUP Catalogue,

Oxford University Press, No. 9780199252008.

Chenuos, N. K., Mohamed, A. B., & Stephen, K. (2014).

Effects of Corporate Governance on Microfinance

Institutions Financial Sustainability in Kenya.

European Journal of Business and Management,

(30), 71-81.

Christen, R. P. (2000). Bulletin highlights. Micro banking

Bulletin 4, 41–46.

Gyan Management Journal Year 2024, Volume-18, Issue-2 (July-December)

Copestake, J.G. (2007). Mainstreaming microfinance:

social performance management or mission drift?

World Development, 35(10), 1721-1738.

Cull, R., Demirgüç-Kunt, A., & Morduch, J. (2011).

Does Regulatory Supervision Curtail Microfinance

Profitability and Outreach? Policy Research Working

Paper 4748. World Development, 39(6), 949-965.

Dalton, D. R., Daily, C. M., Ellstrand, A. E., & Johnson, J. L.

(1998). Meta-analytic reviews of board composition,

leadership structure, and financial performance.

Strategic Management Journal, 19(3), 269-290.

Danoshana, S., & Ravivathani, T. (2013). The impact of

the corporate governance on firm performance: A

study on financial institutions in Sri Lanka. Merit

Research Journal of Accounting, Auditing, Economics,

and Finance, 1(6), 118-121.

David N. B., Elizabeth, W. & Michael, T. H. (1994). A Time

to Grow and a Time to Die: Growth and Mortality of

Credit Unions in New York City, 1914-1990. AJS 100

(2), 381-421.

Di Benedetta, P. Lieberman, I. W., & Ard,

L. (2015). Corporate Governance in Microfinance

Institutions. International Bank for Reconstruction

and Development: The World Bank, Washington, DC.

Dilven, M. (2017). The effect of competition, regulation,

and profit orientation on the social and financial

performance of microfinance institutions. Master

Thesis Economics, Radboud University Nijmegen.

Easley, D., & O’Hara, M. (1988). Optimal non-profit firms,

in Rose-Ackerman, S. (Ed.). Economics of Non-

Profit Institutions. New York: Oxford University Press.

Elbahar, E.R., El-Bannany, M., & El Baradie, M. (2021).

Characteristics of Audit Committees and Banking

Sector Performance In GCC. Journal of Governance

and Regulation, 10(4), 302–310.

Ferede, Y. (2012). The Impact of Corporate Governance

Mechanisms on Firm’s Financial Performance:

Evidence from Commercial Banks in Ethiopia.

Master’s Thesis, Addis Ababa University.

Fondas, N., & Sassalos, S. (2000). A different voice in the

boardroom: How the presence of women directors

affects board influence over management, Global

Focus 12, 13-22.

Gaur, S. S., Bathula, H., & Singh, D. (2015). Ownership

concentration, board characteristics and firm per-

formance: A contingency framework. Management

Decision, 53(5), 911-931.

Gupta, N., & Mirchandan, A. (2019). Corporate gover-

nance and performance of microfinance institutions:

recent global evidences. Journal of Management and

Governance, 24, 307–326.

Hameed, A., Ramzan, M., Zubair, H. M. K., Ali, G., &

Arslan, M. (2014). Impact of compensation on

employee performance (empirical evidence from the

banking sector of Pakistan). International Journal of

Business and Social Science, 5(2), 302-309.

Hartarska, V. (2004). Governance and Performance of

Microfinance Institutions in Central and Eastern

Europe and the Newly Independent States. William

Davidson Institute Working Paper Number 677, April

Hartarska, V. (2005). Governance and performance of

microfinance organizations in Central and Eastern

Europe and the newly independent states, World

Development (33), 1627–1643.

Hartarska, V., & Nadolnyak, D. (2007). Do regulated

microfinance institutions achieve better sustainabil-

ity and outreach? Cross-country evidence, Applied

Economics, 39(10/12), 1207–1222.

Healy, P., & Palepu, K. (2001). Information asymme-

try, corporate disclosure, and the capital markets: a

review of the empirical disclosure literature, Journal

of Accounting and Economics 31, 405–440

Helms, B. (2006). Access for All: Building Inclusive

Financial Systems. Washington: CGAP.

Hermalin, B. E., & Weisbach, M. S. (2003). Boards

of Directors as an Endogenously Determined

Institution: A Survey of the Economic Literature.

Economic Policy Review, 9(1), 7-26.

Horsthuis, L. (2019). Internal Corporate Governance

Mechanisms and Corporate Performance: Evidence

from Dutch Listed Firms. The University of Twente,

Master’s Thesis.

Houston, J., & James, C. (1995). CEO compensation and

bank risk: is compensation in banking structured to

promote risk-taking? Journal of Monetary Economics

, 405- 431.

Jensen, M. (1993). The modern industrial revolution, exit,

and the failure of internal control system. Journal of

Finance, 48(3), 831–880.

John, K., Mehran, H., & Qian, Y. (2004). Regulation,

Subordinated Debt and Incentive Features of CEO

Compensation in the Banking Industry. Staff

Reports no. 308, Federal Reserve Bank of New York.

Gyan Management Journal Year 2024, Volume-18, Issue-2 (July-December)

John, K., & Qian, Y. (2003). Incentive features in CEO

compensation in the banking industry. Economic

Policy Review, 9(1), 109–121.

Kipkoech, R., & Rono, L. (2016). Audit Committee Size,

Experience, and Firm Financial Performance:

Evidence Nairobi Securities Exchange. Research

Journal of Finance and Accounting, 7(15), 87-95.

Kyereboah-Coleman, A. (2006). Corporate board diver-

sity and performance of microfinance institutions:

the effect of gender, Studies in Economics and

Econometrics 30(3), 19- 33.

Kyereboah-Coleman, A., & Biekpe, N. (2005). Corporate

governance and the performance of microfinance insti-

tutions (MFIs) in Ghana. Working paper, UGBS, Legon.

Kyereboah‐Coleman, A., & Osei, K. A. (2008). Outreach

and profitability of microfinance institutions: The

role of governance. Journal of Economic Studies, 35(3),

–248

Letenah, E. (2015). Board Diversity, External Governance,

Ownership Structure and Performance in Ethiopian

Microfinance Institutions, University of South Africa,

(3), 96-106.

Lipton, M., & Lorsch, J. W. (1992). A modest proposal for

improved corporate governance, Business Lawyer

, 59–77.

Mangena, M., & Tauringana, V. (2008). Corporate boards,

ownership structure, and Firm performance in an envi-

ronment of severe political and economic uncertainty.

British accounting association conference. Blackpool.

Mersland, R., & Strom, R.O. (2007). Performance and

corporate governance in Microfinance institutions,

MPRA paper 3887, university of Munich.

Mersland, R., & Strøm, R.O. (2008). Performance And

Trade-Offs In Microfinance Organisations—

Does Ownership Matter? Journal of International

Development, 20(4), 598–612.

Mersland, R., & Strom, R.O. (2009). Performance and

Governance in Microfinance Institutions. Journal of

Banking and Finance, 33(4), 662–669.

Muwamba, D. (2012). Sustainability of MFIs through

corporate governance mechanism: A crosscoun-

try analysis of regulation on outreach and oper-

ational self-sufficiency. PhD Thesis, University of

Massachusetts, Boston, USA

Ntim, G., & Osei, A. (2011). The Impact of Corporate

Board Meetings on Corporate Performance in South

Africa. African Review of Economics and Finance,

(2), 83-103.

Okoye, L. U., Erin, O. A., Ado, A., & Areghan, I. (2020).

Corporate Governance and Financial Sustainability

of Microfinance Institutions in Nigeria: Conference:

Sustainable Economic Growth, Education Excellence,

and Innovation Management through Vision 4035-

Rehman, A., Ali, T., Hussain, S., & Waheed, A. (2021):

Executive remuneration, corporate governance,

and corporate performance: Evidence from China.

Economic Research- Ekonomska Istraživanja, 1-27.

Roberts, P.W. (2013). The Profit Orientation of

Microfinance Institutions and Effective Interest

Rates. World Development, 41, 120-131.

Robinson, M. (2001). The Microfinance Revolution:

Sustainable Finance for the Poor, the world bank.

Safugha, G. F. (2017). The Effect of Corporate Governance

Practice on Microfinance Institutions Performance:

A Case from Nigeria. The Business School University

of Roehampton London.

Sanda, A. U., Mukaila, A. S., & Garba, T. (2003). Corporate

governance mechanisms and firm financial per-

formance in Nigeria. Final Report Presented to the

Biannual Research Workshop of the AERC, Nairobi,

Kenya, 24-29.

Sarkar, J., & Sarkar, S. (2018). Bank Ownership, Board

Characteristics, and Performance: Evidence from

Commercial Banks in India. International Journal of

Finance, 6(17),1-29.

Sharma, B. (2017). Microfinance intervention and peo-

ples’ perception: A study on NGOs MF programme.

Adv. Res. J. Soc. Sci., 8(2), 337-34.

Sharma, V., Naiker, V., & Lee, B. (2009). Determinants

of Audit Committee Meeting Frequency: Evidence

from a Voluntary Governance System. Accounting

Horizons, 23(3), 245–263.

Shrader, C. B., Blackburn, V. B., & Iles, P. (1997). Women

in management and firm financial performance: An

exploratory study. Journal of Managerial Issues 9 (3),

-372.

Siele, J. (2009). Effects of corporate governance structure

on performance of MFIs in Ghana. Journal of Policy

and Development Studies, 1(2), 24-33.

Simon, M. W., Roselyn, G., & Ken, W. (2003). The Effects

of Leadership Characteristics on Microfinance

Institutions’ Social Performance in Kenya. European

Journal of Business and Innovation Research,1(1),

-43.

Gyan Management Journal Year 2024, Volume-18, Issue-2 (July-December)

Sinclair, H. (2012). Confessions of a Microfinance Heretic:

How Microlending Lost its Way and Betrayed the

Poor, San Francisco, Berrett-Koehler.

Singh, D. A., & Gaur, A. S. (2009). Business group affil-

iation, firm governance, and firm performance:

Evidence from China and India. Corporate

Governance: An International Review, 17(4), 411-

Steinwand, D. (2000). A risk management framework for

microfinance institutions. GTZ, Financial Systems

Development, Eschborn, Germany.

Tchakoute-Tchuigoua, H.T. (2010). Is There a Difference

in Performance by the Legal Status of Microfinance

Institutions? The Quarterly Review of Economics and

Finance, 50(4), 436-442.

Tchakoute-Tchuigoua, H.T. (2014). Institutional framework

and capital structure of microfinance institutions.

Journal of Business Research, 67(10), 2185–2197.

Thrikawala, S.S., Locke, S., & Reddy, K. (2013). Corporate

Governance – Performance Relationship in

Microfinance Institutions (MFIs). Asian Journal of

Finance & Accounting, 5(1), 160-182.

Thrikawala, S.S., & Locke, S. (2018). Board Diversity and

Performance of Microfinance Institutions (MFIS):

Evidence from an Emerging Economy. Centre for

Business and Enterprise, Wintec, New Zealand.

Conference paper

Vafeas, N. (1999). Board meeting frequency and firm per-

formance. Journal of financial economics,53(1), 113-

Downloads

Published

2023-11-27

Issue

2023: Gyan Managment Conference Special Issue (2023)

Section

Research paper

License

Copyright (c) 2023 Gyan Management Journal

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

How to Cite

Asmare, A.S., & Kumar, N. (2023). Effect of Corporate Governance on the Financial Performance (Sustainability) of Microfinance Institutions in Ethiopia. Gyan Management Journal, (I), 59–73. https://doi.org/10.48165/gmj.2023.conf9
Crossref
Scopus
Google Scholar
Europe PMC