Abstract

This study examined the impact of corporate governance on the financial performance of MFIs. Despite the substantial theoretical development in the field of corporate governance over the past decades, the gap between theory and practice 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. The 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 impact 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 have been used.

CHAPTER ONE

INTRODUCTION

1.1Background of the Study

The idea of corporate governance is mostly common to banks and multinational firms. Corporate governance has been an item of great importance on the policy agenda in most developed countries for many years now. Further to this, the idea of corporate governance is steadily gaining huge recognition in the African continent.

Several recent activities have led to the increased pursuit of ineffective corporate governance policies in all nations. The case of having effective governance policies gained universal recognition from a period of absolute ambiguity after series of high-profile collapses led to significant interest.

The rise in company failures and increased fraudulent activities in recent times have led to a significant pursuit in terms of literature and study of governance principles to determine best codes of practices that will improve company performance and going concern.

A significant element in the pursuit of an effective corporate governance system is the responsibility bestowed on the board of directors of the company. The board is in place to supervise and monitor the activities of management and also determine the strategic position of the company.

The board appraises and approves management proposals, and they are the first and most significant check for effective governance practices in the firm (Brennan, 2006 and Jonsson, 2005).

Corporate governance is the procedure by which public corporations are governed and monitored by the stakeholders: shareholders, auditors, regulators, credit agencies, and so forth (Kim and Nofsinger, 2007).

It is most often viewed as both the structure and the relationships which determine corporate direction and performance. The relationship between good governance and firm performance is widely argued by researchers.

Corporate governance has become an important topic in developed countries after some events such as frauds and company collapses. In recent years, it has also attracted great attention in developing countries.

Many stock exchanges and regulatory bodies issued directives regarding corporate governance mechanisms and disclosures about them. The Cadbury report (1992) simply defines corporate governance as ‘the system by which companies are directed and controlled.

In a report written for OECD, Iu and Batten (2001) defined corporate governance as follows; “Corporate governance refers to the private and public institutions, including laws, regulations and accepted business practices, which together govern the relationship, in a market economy, between corporate managers and entrepreneurs (corporate insiders) on one hand, and those who invest resources in corporations, on the other”.

Corporate governance is especially important for publicly held companies with a large shareholders group who are not engaged in the day-to-day operations and have no direct access to inside information. Corporate governance is a framework that specifies the responsibilities and rewards of the parties involved.

Although some authors cite different theories as the background of corporate governance, agency theory (Jensen, Meckling 1979) is regarded as the theoretical base of the concept of corporate governance. There is an agency relationship between shareholders (owners) and the board of directors, corporate governance refers to the mechanisms designed to resolve the problems arising in this relationship.

The term ‘governance’ is different from ‘management’ and its root is ‘to govern’, which means the administration of the State. However, management refers to the day-to-day and long-term decisions in the fields of finance, operations, marketing, and so on. Therefore, governance is like the bureaucratic administration of the company.

Although both of these concepts refer to different aspects of the company, the common point is that they have great importance on the success or failure of the company. In the literature, there are many studies about the relationship between different fields of management and the performance of the company.

Similarly, the question of whether corporate governance has any positive or negative effects on the performance of the company has been a concern in the literature. Corporate governance issues in both the private and public sectors have become a popular discussion topic in the last two decades (Hartarska 2005). There have been some legislative changes and provisions imposed by governments on public and private organizations around the world to improve their governance arrangements.

It is therefore necessary to point out that the concept of corporate governance of MFIs and very large firms has been a priority on the policy agenda in developed market economies for over a decade (Bassem 2009).

Further to that, the concept is gradually warming itself as a priority in the African continent. Indeed, it is believed that the relatively poor performance of the corporate sector in Africa has made the issue of corporate governance a catchphrase in the development debate. Several events are therefore responsible for the heightened interest in corporate governance especially in both developed and developing countries.

Corporate governance is a principal issue for the improvement of economic potency that involves relationships of shareholders, Board of directors, chief executive officer, and alternative stakeholders. It is instrumental in setting business objectives and provides tools to fulfill goals and monitor performance. Performance measurement is one of the key monetary problems in corporations. As many choices are created within and out of doors of the corporate measurement monetary performance of firms is extremely very important.

All selections associated with investments, companies’ capital increment, agency relationship, and plenty of others are supported by measurement of performance.  In today’s socio-economic and political systems within the world, governance has become of crucial importance.

Most corporations have many owners that have no involvement in the managerial duties of individuals with equity in the firms. Shareholders are several, and a median investor holds a less significant part of the share capital of an organization.

In relation to this, such an investor tends to require no interest to observe managers, who are then left to themselves and may not act within the best interests of the owners of the entity. Eventually, equity homeowners could find that their investments have reduced in value due to the recent collapse of the profitability of banks in Africa as a whole.

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 guarantees 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 that do not have the status of banks or financial institutions, 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 microcredits, though private equity, mutual funds, hedge funds, and other organizations 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.

Microfinancing 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 facilities 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 informal 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. Rock and al., (1998), good corporate governance has been identified as a key bottleneck to strengthen the financial performance of MFIs and increase the outreach of microfinance.

Indeed, it is believed that the Asian Crisis and the 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 the practice of good governance by MFIs generates investor’s goodwill and confidence.

1.2 Statement of the Problem

Over the last few decades, the business environment has evolved, registering innumerable developments. These key developments include how organizations are directed and controlled, the ownership and financing structure, aligning organization’s strategies with environmental forces and stakeholder’s engagement (Shleifer & Vishny, 1997; Dewji & Miller, 2013; Capital Markets Authority (CMA), 2015).

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

These are shareholders, directors, and management, creating the structure of corporate governance. Thus, corporate governance is a key driving force in a firm’s performance. Since the last monetary distress that occurred the world over, the influence of company there has been increased interests in the study of the impacts of governance practices on the financial performance of banking institutions.

The lack of internal controls, weak company governance practices, weaknesses in restrictive and superior systems, business executive loaning, and conflict of interest are factors behind the history of poor governance system within the banking system during which has resulted in the autumn of the many monetary establishments with others sinking receivership (Centre for company Governance (CCG), 2004).

Despite the measures place in situ by establishments like the financial institution of Republic of a study by Manyuru (2005) on governance structures of firms in Africa and the corresponding increase in the returns on shares while a study by Matengo (2008), focused on the association between governance activities of a company and the actual outcomes, with the focus on African countries.

Due to the intermediateness of the outcomes of the studies, it is necessary to conduct further studies to determine the impacts of a company’s governance on the financial outcomes of financial institutions.

While there has been an interest in the study of governance structures of financial institutions, there are still few empirical studies that have been conducted to investigate the topic. There is also a limit to the understanding of the concept of the governance structure of financial institutions due to few published materials.

Due to limited studies on corporate governance policies in banks and their impacts on the financial outcomes of banks, shareholders have not gained insight regarding the policies that can be implemented to improve their returns on investments.

Even though many studies have been conducted to identify the relationship between corporate governance practices and firm performance, there are limited scholarly studies conducted for the microfinance sector of Cameroon in relation to corporate governance.

Kerubo, (2011) carried out a study based on corporate governance practices in microfinance institutions and did not focus on its impact on financial performance. The increasing emphasis in recent years on financial sustainability rather than on social mission has led to allegations of mission drift among Microfinance Institutions.

It is in this context that the issue of corporate governance of Microfinance institutions becomes increasingly relevant. Consequently, it is required that this topic should be tackled to determine the impacts of Corporate Governance on financial performance.

This study is based on the question: What is the relationship between Corporate Governance policies and the financial performance of microfinance institutions in the South West Region, Cameroon?

1.3 Research Questions

To what extent can corporate governance influence the financial performance of microfinance institutions in the South West Region, Cameroon?

Specifically, we have the following subsidiary questions

1. To what extent can Board size influence the returns of assets of microfinance institutions?
2. What is the incidence of women on board on the return on equity of MFIs?
3. How can CEO – Chairman Duality affects the net profit margin of MFIs?