Abstract

This study examined the effect of corporate governance on the financial performance of MFIs in the Fako Chapter. Despite the substantial theoretical development in the field of corporate governance over the past decades, the gap between theory and practical still needs to be reconciled, many MFIs close down due to the problem of governance.

A cross sectional survey was utilized in the study; primary data was collected using questionnaires. Descriptive, correlative and inferential statistic was used to analyze the data. It has been noticed that a significant relationship exists between management control and economic profitability and the composition of the Board of Directors, its structure and procedures on financial profitability.

Our work constituted an attempt to find out the effect that corporate governance has on the financial performance of microfinance institutions. The results of our analyses showed that, the implementation of a sound management control positively and significantly affects the economic profitability of MFIs, it has a high correlation coefficient.

It also showed that the financial profitability of microfinance institutions is positively affected by the procedures and composition of the governing board of directors. We strongly recommend that microfinance institutions should increase the number of their board committees so that they can be able to effectively take part in control, education of members and the sensitization of the general public. The board should also communicate to members and shareholders how the resources of the institution are being used

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

There is no institution that seeks to remain stagnant throughout its lifespan. While some may be fighting to grow in terms of financial prowess, others may fight to grow in size or in the market sphere and share.

However, the ability to achieve whatever growth objective a corporation set depends on how well the institution is governed with respect to building credibility, ensuring transparency and accountability as well maintaining an effective channel of information disclosure that would foster good corporate performance.

Galema et al. (2011) are of the argument that the strength of the corporate governance structure practised in each institution determines the system’s vulnerability to uncertainties and eventual risks; the reason why some institutions fail and others succeed. In some institutions, little attention has been paid to the corporate governance system enforced, thus reducing the possibility of sustainability.

The minimal attention to the role of corporate governance on the financial performance of microfinance institutions in general is unfortunate because they serve millions of poor and vulnerable members of the society especially in the developing countries.

In Africa, this microfinance idea is fundamental in alleviating poverty through the enhancement of financial inclusion. Shaw (2006) and Okwee (2011)  are of the view that in many developing countries, the system of microfinance institutions governance like any other form of corporate governance is “relationship based rather than “rules-based” and this has led to the promotion of insider trading.

This owes to the fact that microfinance institutions are democratically run financial institutions whose governance principles differ with those of conventional for profit financial institutions. MFIs have as mission to meet the financial and socio-cultural needs of their members/customers and this poses a challenge in that not so much has been done on the governance principles of these institutions. Therefore, MFIs are faced with the challenge of developing a rules-based approach of corporate governance to meet the rapid growth and the resulting management challenges.

Mugenyi (2010) contends that despite the rapid growth and the importance attached to these institutions in the finance sector, their biggest challenge remains the corporate governance mechanism.

These challenges include; the existence of a volunteer board of directors, limited individual influence despite the “one-man one-vote decision making system and the absence of a common legal framework. He enumerated the roles of the board referring to them as the leaders in the MFIs but expressed dissatisfaction on the fact that most board members have multiple agendas and this plays a great role on the governance principles adopted by such boards. This will have a trickledown effect on the staff since the board which is the head has failed to reach a consensus on which policies to put in place for the executive director to execute. To him, an effective board must speak in one voice and make realistic

targets with a clear vision, strategic plans, policies, procedures and a job description. He further reiterated that the board members must be masters in policy development through frequent trainings, (SACCA, 2012).

During the economic crisis in the second half of the 1980s many African countries were affected; especially 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 a very short period of time they could manage.

This encouraged the proliferation of many small savings and loans institutions. Microfinance is the provision of financial services by registered entities which do not have the status of banks or big financial institution, to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services.

MFIs are the main facilitators of funding through the provision of micro credits, though private equity, mutual funds, hedge funds and other organisations have become important as they invest in various forms of debt. The field of microfinance deals with time, money, risk and how they are interrelated.

The significance of governance of the organization has risen consistently since the mid-1980s, and as of late the significance of governance of the organization rationality has achieved a genuinely abnormal state as intensity has improved. It is characterized as “” the guidelines and practices by which the organization is guided or worked,” “and it additionally improves the connection between the organization’s administrators and investors just as partners.

It adds to monetary development and money related security by improving business sector ensures, budgetary markets, trustworthiness and monetary effectiveness (Christensen et al., 2010) with the goal that the insufficiency of governance of the organization strategies of open and private segments is positioned among the significant reasons for organizations and universal money related emergency.

Micro financing can be traced back to an obscure experiment in Bangladesh about 40 years ago owing to the works of Muhammed Yunus in 1976 who is known as the founder of Grameen Bank and Nobel Peace Prize Winner of 2006.

According to the Consultative Group to Assist the Poor (CGAP, 2006), microfinance is the provision of basic financial services to impoverished clients who otherwise lack access to financial institutions. Microfinance institutions help to reduce poverty by providing the poor with sustainable credit facility to start small businesses.

Three features distinguish microfinance from other formal financial products viz: the smallness of loans’ advances and or savings collected, the absence of asset based collaterals, and simplicity of operations. In relation to the features of microfinance, the poor are more likely to lose their money through fraud or mismanagement in informal savings arrangements than are depositors in formal financial institutions.

The movement of Microfinance in Cameroon has its roots in the year 1960s through the creation of the first cooperative in 1963 by a Dutch Catholic father Alfred Jensen in Njinikom; North-West region of Cameroon. This Cooperative is the founding father of CAMCCUL (Cameroon Cooperative Credit Union League). The recent waves of corporate scandals in developed countries indicate that there is much room for improvement of governance practices even in countries with well-functioning markets and in industries with established mechanisms of control.

Investigating corporate governance practices in microfinance institutions is important because of the significant resources they leverage in regard to poverty alleviation. According to Rock et al., (1998), good corporate governance has been identified as a key tool to strengthen the financial performance of MFIs and increase outreach of microfinance.

Also, it is believed that the Asian Crisis and seemingly poor performance of the corporate sector in Africa have made the concept of corporate governance a catchphrase in the development debate (Berglof and Von Thadden, 1999). It is believed that practice of good governance by MFIs generates investor’s goodwill and confidence.

The financial performance of microfinance institutions is a necessary condition for institutional sustainability (Hollis and Sweetman, 1998). Over the last few decades, the business environment has evolved, registering innumerable developments. These key developments include how organisations are directed and controlled, the ownership and financing structure, aligning organisations’ strategies with environmental forces and stakeholder’s engagement (Shleifer & Vishny, 1997; Dewji & Miller, 2013; Capital Markets Authority (CMA), 2015).

Despite these advancements, organisations are still faced with challenges such as the separation of ownership and control (Jensen & Meckling, 1976; Shapiro, 2005) this separation leads to emergence of governance issues where the three main corporation’s stakeholders interplay. These are shareholders, directors and management, creating the structure of corporate governance.

Given the fact that there exist a lot of asymmetry of information between the principal and the agent, and that the interest of the principal (revenue) is different from that of the agent (power, prestige, job security), there exist a conflict of interest between these two parties and inured to solve this problem and bring the two together, management has to be accountable to the board in every aspect of the company (corporate governance).

According to Charreaux, (1997), it is “all the organisational mechanisms which have the effect of limiting the powers and of influencing the decisions of the management, in other words, which govern their conduct and define their discretionary space”.

1.2 Statement of the Problem

African MFIs have structural weaknesses at several levels: governance, portfolio management, internal control, human resources and lack of financial sustainability. The Cameroon microfinance sector has made remarkable progress during the last ten years, due to the dynamism of the main actors who are the State, the MFIs and development partners (Fotabong, 2008).

The above progress is evident from the volume of microfinance activities, proximity of the targeted vulnerable customers and the flexibility of the access conditions to the services which help to fight against poverty. But currently, the sector faces serious problems partly due to the 1990s economic crisis that made Cameroon to devaluate its currency in 1994.

Also regarding COBAC prudential standards, many microfinance establishments failed to comply with the required standards for the solidarity fund. The difficulties can be viewed as problems involved in the control and supervision of the sector, in the regulation framework, and in the establishment of microfinance enterprises. The advent of the Anglophone crisis in 2016 also greatly affected the activities of MFIs. The insufficiency in the control of the microfinance sector due primarily to the insufficiency of financial, human and material means at the disposal of the regulatory and control agencies remain a big problem.

Although the microfinance industry has proved its worth as a weapon against poverty, it is still going through a critical phase especially with regards to governance practices within these organisations (Labie, 2001). Most Microfinance Institutions (MFIs) face the challenge of achieving sustainability, but are also faced with the problem of governance (Mersland and Oystein Strom, 2009). Mersland and Oystein Strom (2009) argued that, in order to improve the performance of MFIs and make microfinance a more effective weapon against poverty and hunger, it is important that we start by understanding the influence of governance on the industry. Good governance of MFIs requires a clear strategic vision of the organisation, transparency and efficient management strategy acceptable by all involved with the organisation (Lapenu and Pierret, 2006).

Many microfinance institutions in Cameroon do not clearly outline their governance principles, making it difficult for their customers to be involved in the day to day operations of the institutions Nuamah, (2014) concluded that the collapse of MFIs was caused by the inability of MFIs to sustain operations and fraudulent activities by staff.

Another study by Kofi, (2012), established that most microfinance institutions collapsed on the account of non-performing loans. Kofi went further to state that the problem of non-performing loans was a challenge to the growth of microfinance institutions.

As to what concerns the collapse or failure of MFIs, COFINEST which was one of the biggest microfinance institution in Cameroon collapsed and her failure was accounted for by the mismanagement of funds due to the lack of transparency in the management system of this institution. Other microfinance institutions like FIFA, Dominion finance, Raven green finance and Global finance (which went operational between 2008 and 2010) also went 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 great importance to its growth.  Indeed, after the bankruptcy of Cofinest and FIFA some years ago, Crédit Mutuel and Comeci were in trouble, Société Financière Africaine (SFA) was put under administration, while Binum Tontine, Djagui du Cameroun and Mutuelle de Développement et d’Investissements du Cameroun (MDIC) simply had their approval withdrawn, Mutual Savings bank was the third financial institution to be put under provisional administration in 2017 after Credit Mutuel in December 2016 and Cecec SA. In 2017, the volume of defaulted loans in Cameroon MFIs portfolio was 106.4billion (quite higher than all other CEMAC countries) revealed in June 2018 during the official launch of the Microfinance credit risk division in Yaounde.

Efficient management can help to recover part or some delinquent loan before they turn into bad debt. Also survival is possible provided there is a source of funding (both internal and external sources) to cover shortages. However, it cannot be disputed that some major financial distress and bankruptcy are the result of loan delinquency.

This alone cannot be the sole reason for the “ghost” nature of MFIs in Cameroon. Some of these institutions have good reputation and stable financial records. For example, Credit communute d’ Afrique (CCA), Advance Cameroon, CAMCCUL, Buea Police credit union and many others. Their stable nature with many other services (micro insurance and micro transfer) make many customers and members to believe they are unavoidable. But is very easy to realize other MFIs that open their doors today and close one, two or three years later.

This was the case of dominion finance, Raven green finance, global finance that went operational between 2008 and 2010 and by 2011 went bankrupt. Recovering of deposit in case of bankruptcy is never possible considering limited intervention from authority.

Despite the difficulties, the Cameroonian micro-finance institutions occupy currently, an appreciable range in the field of micro-finance at the continental scale. It is for these reasons that this study set out to investigate the effects of corporate governance on the financial performance of microfinance institutions in the Fako chapter of the South West Region of Cameroon.

1.3 Research Questions

1.3.1 Research Question

What is the effect of Corporate Governance on the financial performance of microfinance institutions in the Fako Chapter of the South West Region, Cameroon?

1.3.2 Specific Research Questions

1. How does Board size influence the profitability of MFIs?
2. What is the effect of the audit committee on the profitability of MFIs?
3. How does internal control affect the profitability of MFIs?

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