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Advances in Social Sciences Research Journal – Vol. 11, No. 11

Publication Date: November 25, 2024

DOI:10.14738/assrj.1111.17896.

Bin, A. K.-N. (2024). The Interrelation between Corporate Governance Practises and the Financial Performance of Microfinance

Institutions in CEMAC. Advances in Social Sciences Research Journal, 11(11). 154-172.

Services for Science and Education – United Kingdom

The Interrelation between Corporate Governance Practises and

the Financial Performance of Microfinance Institutions in CEMAC

Anyekezeh Kum-Ngong Bin

Pan African University, Institute of Governance,

Humanities and Social Sciences

ABSTRACT

This study aims to examine the relationship between corporate governance tools—

specifically board size, board gender diversity, capital structure, ownership

structure, and audit—and financial performance of microfinance institutions as

measured by Return on Assets (ROA) and Operational Self-Sufficiency (OSS).

Quantitative data is employed to identify the relationship between the variables. A

dataset comprising forty-four microfinance institutes extracted from the Mix

Market database for the period 2000 to 2021 is utilised. The research identified

correlations between Microfinance Institutions’ financial performance and their

board characteristics, capital structure, ownership structure and audit. The

exploratory variables all produced significant results. The study identified

significant relationships between the examined Corporate Governance practices

and the financial performance of microfinance institutions in CEMAC. Capital

structure positively influences the ROA and the constructed financial performance

index but negatively influences the OSS of microfinance institutions in CEMAC when

ownership structure is accounted for and audit is not accounted for. Ownership

structure (those which have NGO and NBFI forms) positively influences the ROA and

the constructed financial performance but negatively influences the OSS of

microfinance institutions to a significant extent. Constructed board characteristics

index (board size and board gender diversity) positively influences the ROA and the

constructed financial performance index but negatively influences the OSS of

microfinance institutions in CEMAC when ownership structure is accounted for and

audit is not accounted for. Microfinance size has a positive effect on ROA and OSS

but a negative one on the computed finance performance index. When audit is

accounted for excluding ownership structure, we conclude that capital structure

positively influences the OSS and the constructed financial performance index but

negatively influences the ROA of microfinance institutions in CEMAC. The

constructed board characteristics index (board size and board gender diversity)

positively influences the OSS and the constructed financial performance index but

negatively influences the ROA of microfinance institutions in CEMAC when audit is

accounted for and ownership structure not. Being audited by large firms leads to a

decrease in OSS, an increase in ROA and a general decrease in the constructed

financial performance index in microfinance institutions in CEMAC when

ownership structure is not considered. This study highlights the significance of

corporate governance tools and their effectiveness in the success of organizations.

Keywords: Corporate Governance, Microfinance Finance Institutions, Financial

Performance, OSS, ROA.

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Bin, A. K.-N. (2024). The Interrelation between Corporate Governance Practises and the Financial Performance of Microfinance Institutions in

CEMAC. Advances in Social Sciences Research Journal, 11(11). 154-172.

URL: http://dx.doi.org/10.14738/assrj.1111.17896

INTRODUCTION

Microfinances exist to provide financial services to the underserved members of society

(Ledgerwood, 1999), primarily in developing nations wherein there is a low financial

penetration rate as compared to wealthy economies (Chiu, 2015). Since these underprivileged

communities cannot afford the collateral requirements and market interest rates, and because

the costs associated with monitoring and screening their activities are too high for banks to

make lending profitable, mainstream banks do not offer them loans (Hermes and Lensink,

2007). According to the argument made by Tilakaratna and Hulme (2015), microfinance has

gained international recognition in recent years as a crucial tool for reducing poverty, ensuring

home stability, and developing small and medium sized enterprises. The creation of job

possibilities (Raihan et al., 2017), the growth of micro-enterprises, and an improvement in the

general financial health of most countries (Adams and Tewari, 2017) are all suggested as

additional ways that microfinance initiatives have greatly enhanced the social welfare of the

poor (Khandker, 2005).

In the wake of the significant corporate failures and crashes in the world, corporate governance

has developed to effectively supervise and monitor the management of firms. As a result, the

necessity of corporate governance practises has therefore been increasingly recognised by

various companies in recent years. In the same vein, the importance of corporate governance

principles for the institutionalisation and long-term sustainability of microfinance institutions

(MFIs) has also received significant attention from academics and practitioners in the field of

microfinance (Labie, 2001). According to Labie and Mersland (2011), some of the key elements

that account for this include: In first place, the number of assets and client reach of various

types of providers of microfinance services have significantly increased. In second place, a large

number of Non-governmental Organizations (NGOs) have transformed their legal status by

becoming regulated, share-holding MFIs, and credit cooperatives are increasingly constructing

intricate networks. In third place, by switching from a single credit provision to several product

offers, MFIs are now adhering to traditional banking logic. In fourth place, while donor funds

were initially the primary source of capital for MFIs, liabilities management has recently taken

on greater significance. In fifth place, government authorities that previously disregarded the

microfinance system have changed their attitudes towards it by developing regulatory and

oversight frameworks for the healthy growth of the sector. Last but not least, microfinance has

remarkably gained prominence on a global scale, culminating in the United Nations designating

2005 as "The Year of Microcredit" and awarding the Nobel Peace Prize to the pioneer of

microfinance in 2006. These key underlying causes clarify why microfinance governance is a

hotly discussed area of public policy and an intriguing subject for research.

There are a number of reasons why it could be worthwhile to investigate how corporate

governance practises affect the financial performance of MFIs. For instance, MFIs have begun

offering a variety of financial and non-financial services in emerging market countries. 'Green

Microfinance' and 'Microfinance Plus' are two of them that MFIs employ to meet the demands

of their clients in urban and rural areas to enhance environmental sustainability (Mia et al.,

2018). These microfinance innovations were started by MFIs to both keep their current

clientele and draw in new ones (Mia et al., 2018). Additionally, MFIs encounter difficulties with

financial inclusion as a result of the heightened rivalry and the entry of new players into the

market (MIX Market, 2017). As a result, they are forced to consider the varied demands of their

clients more. One such example of a demand-driven approach by clients is the addition of