CHAPTER ONE

INTRODUCTION

1.1 Background to the study

Corporate governance and risk management concepts have evolve over time and have become topical issues in modern business today. Spectacular corporate failures such the Enron, World com, The bank of credit and commerce   international (BCCI) Polly peck international Baring bank and the major losses sustained in 1994 and 1995 following misuse of derivatives (Procter and Gamble, Orange country and Baring), have made it a central issue with various Governance regimes and the emerging of the position of corporate risk officer or CRO to ensure the smooth running of corporate organizations, and prevent such failures.

The emergence of the financial crises across the world including the Asian financial crises in 1997 and the global financial crises in 2007\2008 have being attributed to inefficient and poor governance practices (Golden and Vogel 2010,). The issue of governance began with the beginning of corporations, dating back to the East India company, The Hudson’s Bay Company, The Levant Company and others major chartered companies, during the 16 and 17 centuries.

Though, the concept of corporate governance has existed for centuries, the name did not come into vogue until 1970s. After world war II the United States experienced strong economic growth, which had a strong impact on the history of corporate governance. Corporations were thriving and growing rapidly, managers primarily called the shots and board of directors and shareholders were expected to follow. I most cases, they did. This was an interesting dichotomy since managers highly influenced the selection of board of directors. Unless it came to matters of dividends and stock prices, investors tended to stay clear from governance matter.

Since the 1970s , the concept of financial risk management has evolve considerably , risk management has become less limited to market insurance coverage ,which is now considered a competing protection tool that complements several other risk management activities .After world II, large companies with diversified portfolios of physical assets began to develop self-insurance against  risk  ,which they cover as effectively as insurers from many small risks .Self –insurance covers the financial consequences of an adverse event or losses from an accident (ERLISH and BECKERS 1972; Dionne and EECHHOUDT, 1985).Risk management has long been associated with the use of market insurance to protect individuals and companies from various, losses associated with accident .(Harrington and Neihaus, 2003).

In 1982, Crock ford wrote ; ‘’operational convenience continues to dictate  pure and speculative risk that should be handled by different functions within a company even theory may argue for them being manage as one For practical purpose therefore, the emphasis of risk management continues to pure risk ‘’. In this remark, speculative risks were more related to financial than the current definition of speculative risks.

New forms of risk management emerge during the mid-1950s as alternative to market insurance when different types of insurance became very costly and incomplete. Several business risks costly or impossible to insure during the 1960s, contingent planning activities were developed and various risk prevention risk prevention or self-protection activities and self-insurance instruments against some losses were put in place. The use of derivatives as instruments to manage insurable and uninsurable risk began in the 1970s and developed very quickly during the 1980s .it was also in the 1980 that companies began to consider financial management or risk portfolio.

Financial risk management has become complementary to pure risk management in many companies. Financial institutions such as banks and insurance companies intensify their market and credit risk management activities during the 1980s, operational and liquidity risk management emerge in the 1990s. International regulation of risk also began in the 1990s, financial institutions develop internal management models and capital calculation formulas to protect themselves from unanticipated risk and reduce regulatory capital.  At the same the governance of risk management become essential, integrated risk management was introduced and the first risk manager position were created.

During the economic crisis in the second half of the 1980s many African countries were effected, Specially Cameroon where the financial sector was greatly damaged. The banking sector became very suspicious after the crisis and could only give out loans with adequate guarantee and for very short period of time they could manage.

This encourage the profiteration of many small saving and loans institutions, Microfinance is the provision of financial services by registered entities which do not have the status of banks or financial institutions, to low –income clients or solidarity lending groups including consumers and self-employed, who traditional lack access to banking and related services. MFIs are the main facilitators of funding through the provision of micro credits through private equity, mutual funds, hedge funds and other organization have become important as they invest in various forms of debt.

Micro-financing can be trace back to an abscure experiment in Bangladesh years ago owing to the work of Muhammed Yunis in 1976 who is known as the founder of Grameen Bank and noble pace price winner of 2006.Micro finance is the provision of basic financial services impoverished clients who otherwise lack access to financial institutions. Micro finance institutions help to reduce poverty by providing the poor with sustainable credit facilities to start small businesses.

This feature distinguishes micro finance from other formal financial products: these are the smallness of loans, advance base collaterals, the absence of Assets based collaterals, and simplicity of operations. In relation to the features of micro finance, the poor are more likely to lose their money through fraud or mismanagement in informal savings arrangement than depositors in formal financial institutions.

The movement of micro finance in Cameroon has its roots in the year 1960s through the creation of the first corporative in 1963by a Dutch Catholic father Afred Jensen in Njinikom, Northwest region of Cameroon. The corporative is the founding father of CAMCCUL (Cameroon corporative credit union league). In Cameroon for example, MFIs institutions dominate the financial sector and news of having liquidity problem make prominent headlines in most newspapers and channels. Institution that created under the promise of poverty alleviation are becoming tools to get the poor trapped in poverty. Micro finances have been exploited and will continue to be exploited by major stakeholders in micro finances value chain who preach the same doctrine-that of poverty alleviation (fatubong,2011) .

The financial performance of micro finance institution (MFIs have been largely highlighted by the international community (Armendariz de Aghion,1999). However little research has focused on the implication of management policies the impact of some governance issues on development performance has been assessed, but this has mostly been done at the macro-level. Micro finance institutions play a vital role in the economic development of many developing countries.

The recent waves of corporate scandals in develop countries that there is much room for improvement of governance and risk management practices even in countries with well-functioning markets and in industries with established mechanisms of control. Investigating corporate governance and risk management practices in micro finance institutions is important because of the significant resources they leverage in regard to poverty alleviation Rock and al (1998) good corporate governance and risk management has been identified as a key bottleneck to strengthen the financial performance of MFIs and increase outreach of micro-finance indeed, it is believed that the Asian crisis and seemingly poor performance of the corporate sector in African have made the concept of corporate governance and risk management a catchphrase in the development debate (Berglof and von thadden,1999).

It is believed that practices of good governance by MFIs generates investors goodwill and confidence. The recent entrance of investors who provide capital for the advancement of trust worthy microfinance institutions also raises important issues regarding the characteristics and quality of governing bodies that lead these institutions.

Good institutional governance and risk management seeks to ensure that there are transparent and efficient mechanism for monitoring and disclosing the efficiency and effectiveness with which these entrusted to govern the use of these resources, and that they account for stewardship (Mwaura and Gatomah,2000)3. Therefore, this necessitated the need for the study: the effect of corporate governance and risk management on financial performance of MFIs the case of southwest region, Cameroon.

The financial performance of micro finance institution is a necessary condition of institutional sustainability (Hollis and Sweetman,1998). African MFIs have structural weaknesses at several levels: governance, portfolio management, internal control, human resources and lacks the capacity to match the huge needs of the poor; this is because of the challenges relating to their growth.

In recent times, microfinance institutions have faced a lot of challenges retarding their growth; some of challenges are that : the microfinance community has experience some major failures because of inadequacies in its operation including corporate governance (Labie,2001),given its tremendous outreach, its future growth and sustainability depends on how its governed, and to attract further fresh capital in to this industry requires a thorough understanding of corporate governance and risk management practices of MFIs.

1.1.2 Relationship between corporate governance and financial performance

The factor underpinning corporate governance mainly includes shareholding structure, board composition, and senior management .The relationship between these factors and firm performance is the focal point for many scholarly studies moreover, it can be argued that firms performance can be improved with better corporate governance controls in a company .FAMMA and JENSON  (1983:39) argue that corporate governance does affect firm performance .It was discovered that the majority of larger firms with stronger governance controls are rewarded over the long run-term .

Klein, Shapiro and Young (2004:32) examine the relationship between corporate governance and firm value by using the corporate governance index (CGI) AND Tobin’s Q, which measures the firms value. In addition Carse (2000:25) argued that a strong corporate governance standard is particularly important for banks. This is because most of funds that the bank use for business belong to creditors and depositors. The failure of a bank will affect not only its own shareholding, but have a systematic effect on other banks. Therefore, it is important to ensure that banks are operating properly.

On the other hand, a large number of studies have investigated the relationship between ownership structure, and firm performance. Morck, Sheifer, and Vishny (1998:45) argued that higher ownership concentration has a positive impact on firm performance, because its increases the ability of shareholder to properly monitor managers. Not book (2009:65) on corporate governance mechanism and firm performance revealed that separation of the post of chief executive officer (CEOs) is vital for strong and viable corporate governance sustainability. The result added that a board size of ten is more concentration as opposed to diffused equity ownership.

1.1.3 Relationship between risk management and financial performance

Every financial institution faces different types of risk such as liquidity risk, credit risk, operational risk insolvency risk, market risk, Technology risk , interest rate risk ,just to name a few . A major objective of bank management is to increase shareholders return signifying performance. The objective often comes at the cost of increasing risk. The banks motivation for risk management comes from those risk which can lead to bank underperformance.

These are risk related to the internal and external environment of the financial institution or firm, hence the institution has to manage the risk so as to reduce losses. Many research were conducted around the world on this aspect and the researcher listed down review of such works .HARELIMANA JB ( 2007) examine the role of risk management on financial performance of banking institutions in Rwanda the study found out the use of risk management are critical factor to financial performance as measured by R O A( return on assets ratio), ROE( return on equity ratio) and net income marginal.

It concludes that the interaction use of risk management of the factors create an impetus for financial performance as measure by ROA ,ROE and net income marginal .OLUSANMI OLAMIDE 2015 examine the effect of risk management on Banks performance in Nigeria .The study was conducted on 14 listed banks in the financial sector of the Nigerian economy over a period of 6 years (2006-2012).

The findings revealed that management of risk often translate to positive financial performance of banks. AKINDELE (2012) The study examine the effect of risk management and corporate governance on bank performance. The study reveals that there is a positive relationship between risk management and bank performance. Furthermore, the study affirms that effective risk management enhance bank profitability and bank performance.

1.2 Statement of Research Problem.

Corporate governance and risk management on financial performance has been the reason for many researches carried out in the fields of Management, Banking and finance, business administration and other related business fields because this is a measure problem facing every local business entrepreneur and multinational business.

Corporate governance and risk management play a very vital role in managing an institution exposure to losses or risk and protect the valve of its assets as well as improves the company’s Reputation by making more stakeholders willing to work with the MFIs such as government agencies, employees, hence increase in financial performance.

Excessive risk taking (poor risk management) and corporate governance failures have contributed the failure of many financial institutions in Cameroon. As to concerns the collapse of MFIs, COFINEST which was one of the biggest microfinance institution in Cameroon collapsed and her failure was accounted for by the miss management of funds due to the lack of transparency in the management system of the institution. Other microfinance institution like FIFA, Dominion finance, Raven green finance and Global finance (which went operational between 2008and 2010) have also gone bankrupt and this actually affected the growth of MFIs in Cameroon due to the lack of confidence by customers and investors. This is just to emphasize that the implementation of a good corporate governance system in microfinance institutions is of paramount important to its growth.

Nuamah (2014) concluded that the collapses of MFIs was caused by the inability of the sustain operations and fraudulent activities by staff. Another study by Koli, (2012), established the microfinance institutions collapsed on the account of non-performing loans. Koli went further to state that the problem of non-performance loans was a challenge to the growth of microfinance institutions

Corporate governance and risk management have so many advantages to put organization following its guide lines effectively to be superior and to have a high competitive advantage over its competitors. It makes it easier to sport projects in trouble, provides quality data for decision making, its maintains investor confidence, as a result of which company can raise capital efficiently and effectively.

These are some of the benefits of corporate governance and risk management to a company. But any company which does not have an effective governance and risk management frame work is experiencing a percentage lose to companies which have adopted it .this is a problem that is face by al businesses which can aggravate to one shareholder group benefiting unfairly at the expense of other stakeholders groups due to weaknesses in company’s control systems  ,managers could make poor investment decisions ,a company exposure to legal reputational risk could become heightened ,overspent budgets, and reputational damage.

This problem therefore caused the investigation on the effect of corporate governance and risk management on financial performance to be carried out by the researcher.

1.3    Research questions

These are the question that helps the researcher to outline solutions for the attainment of specific objectives to the study. These questions are as follows

1. To what extend can corporate governance and risk management influence the financial performance of microfinance institutions?
2. To what extent can management control influence the financial performance of microfinance institution?
3. What is the incident of board composition on the financial performance of MFIs?

1.4 Research objectives

The main objective of this study is to know the effect of corporate governance and risk management on bank performance. To meet this objective these specific objectives were formulated.

1. To access how corporate governance and Risk management affect the performance of microfinance institution.
2. To access the extern to which management control can influence the financial performance of microfinance institutions
3. To verify if board composition has any significant incident on the financial performance of microfinance institutions.
4. To examine the significant relationship between Corporate Governance, Risk management and bank performance.