Performance and Corporate Governance in Microfinance Institutions

The study traces the relationship between firm performance and corporate governance in microfinance institutions (MFIs) utilizing a self-constructed global data set on MFIs, collected from third-party rating agencies. The study examines the effect of:

• Board characteristics, ownership type, competition and regulation on the MFIs outreach to poor clients and its financial performance.
• Internal mechanisms and ownership, together with the external mechanisms of competition and regulation on the financial and outreach performance of MFIs.

The paper states that:

• Studies have identified corporate governance as a bottle neck in strengthening MFIs financial performance and increasing their outreach;
• However, there has been a lack of empirical studies and data about the result of corporate governance on MFI performance;
• The agency aspect in the firm-customer interactions is important in microfinance because of the centrality of repayment.

The study finds that:

• Overall financial performance improves when:
  • The roles of chief executive officer (CEO) and chairman are split;
  • The CEO is a woman;
  • Loans are made to individuals.
• Stronger competition reduces operational costs, portfolio yield and return on assets.
• The effect of regulation is insignificant.
• There are no significant board size and composition effects upon average loans and credit clients, yet the loan methodology is an important determinant for these outreach variables.
• Outreach improves with group lending.
• There is no difference between non-profit organizations and shareholder firms either in financial performance or in outreach.