Abstract

Good corporate governance has become more important due to the demand for transparency and accountability of funds utilized in microfinance activities. The main objective of this study was to examine the role of corporate governance on the financial performance of MFIs in Cameroon. The relevant literature was reviewed for the purposes of this study.

Explanatory research design was used in trying to establish the causal effect relationship between corporate governance variable (which were; board size, board diversity, board independence and CEO duality). The financial performance measure was Return on Asset. 29 MFIs was selected as a sample from all licensed MFIs in Buea.

Primary data was captured using structured questionnaires completed by certified members, staff and management executives of the selected MFIs as they were in a better position to comment on corporate governance affairs. Secondary data was also collected from MFIs records, articles, credit log books, financial statements, Fako Credit Union chapter reports and income statements, and other publications for the period 2012 to 2015.

Data was analyzed using a multiple linear regression model. The study found that the board size affected financial performance negatively while all the other independent variables affected the financial performance of MFIs positively. There was a significant relationship between Corporate Governance and financial performance of MFIs.

The multiple regression models indicated that 48% of the financial performance of MFIs was contributed by board independence, board diversity and CEO duality. Results are also consistent with Hartarska (2009) whose findings showed a negative relationship between board size and financial performance of microfinance institutions.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Financial scandals around the world and the recent collapse of major corporate institutions in the USA, Europe such as Lehman Brothers, Merril lynch, American International Group (AIG), have brought to the fore, once again, the need for the practice of good corporate governance, which is a system by which corporations are governed and controlled with a view to increasing shareholder‟s value and meeting the expectations of the other stakeholders.

The modern business environment poses a number of challenges that require sound decision making and appropriate corporate governance practices. According to Edward & Clough (2005), recent failures in corporate governance have led to the proliferation of corporate governance codes which emphasize, in particular, accountability and conformance measures in organisations. T

hese codes are to determine what entails good corporate governance in an organisation. For any organisation to succeed in achieving good performance, it must be able to embrace conventional good corporate governance attributes as stipulated in codes such as the Cadbury code in the United Kingdom, Edwards & Clough (2005).

Maher & Anderson (1999), assert that corporate organisations have a responsibility to various parties such as shareholders and other stakeholders such as employees, suppliers and even the society. They further argue that the corporate governance practices in an organization are very significant in determining the incentives and disincentives faced by all the above stakeholders who potentially contribute to  firm’s  performance.

Corporate governance is primarily concerned with how effective different governance systems are in promoting long term investments and commitments amongst the various stakeholders. Kester (1992), indicates that the central problem of governance is to devise specialized systems of incentives, safeguards, and dispute resolution processes that will promote the continuity of business relationships that are efficient in the presence of self-interested opportunism.

In the last two decades, developments in the Cameroon financial sector have reinforced the need for greater concern for corporate governance in financial institutions in the country.

Chow (1999), explained that the objectives of corporate governance are to ensure transparency, accountability, adequate disclosure and effectiveness of reporting systems. He asserted that the need for good corporate governance originates from what  he  termed, “expectation  gap‟‟  problem  which  arises  when  the behaviour of companies falls short of shareholders and other stakeholders expectations.

Turnbull (1997), describes corporate governance as all the influences affecting the institutional processes, including those for appointing the controllers and or regulators, involved in organising the production and sale of goods and services.

In this sense corporate governance is applicable to all types of firms and industries such as companies partnerships, joint ventures etc. whether or not they are incorporated under the civil law.

Although corporate governance in the private sector is of general interest to the Cameroon public, that of microfinance industry is of particular interest because of the catalytic role of microfinances in any economy. Their corporate governance is of prime interest to government, depositors, shareholders and the public at large.

While depositors are more interested in the safety and returns on their deposits as well as quality of services rendered by their banks, government and the public want a safe, sound and stable microfinance industry. Shareholders (owners)  are  more  interested  in  their  banks‟  profitability,  soundness  and  good health; workers are interested in their sustained employment through the continued existence and profitability of their employer-banks.

The microfinance industry itself is after the retention of public confidence through the enthronement of good corporate governance which remains of utmost importance given the role of the industry in the mobilization of funds, the allocation of credit to the needy sectors of the economy, the payment and settlement system and the implementation of monetary policy.

The core issues in corporate governance in any country are the composition of Board of Directors, activities of the members, role of nominal directors and the use of independent directors.

For the microfinance institutions, the chances of success improve substantially when the microfinance practice good corporate governance. Equally when the principles of good governance are not observed, the chances of failure become very significant and inevitable. The level of success which a bank may claim with justification is directly related to the effectiveness of the board in corporate governance.

As noted by Seballos & Thomson (1990) , the ultimate determinant of whether or not a bank fails is the ability of its management to operate the institution efficiently and to evaluate and manage risk. Legislation on corporate governance has followed the pattern laid down several decades ago in England following the collapse of enterprises due to fraudulent manipulation by corporate managers.

The various laws are made to regulate the practice of a particular trade or profession in order to protect investors and ensure a stable business environment.

Corporate governance practices dictate the means through which performance is achieved and measured. According to Yacuzzi (2005), in every organisation there are always forces that oppose change. Corporate governance ensures that there exist policies that can encourage performance. It is the work of the governing body to ensure that corporate performance is measured appropriately. This involves putting in place the measures that the organization will adopt in measuring or evaluating the level of performance.

1.2 Problem Statement

The main challenge of microfinances is to create social benefits and promote financial inclusion by providing financial services to low income households. This is often referred to as the “double-bottom line” of MFIs. 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 MFIs becomes increasingly relevant. Microfinance practitioners have recognised that good governance is critical for the success of MFIs, Campion (1998). Closer examination of the role of various governance mechanisms is important because MFI managers control significant resources.

The microfinance community has experienced some major failures because of inadequacies in its operation, including corporate governance, Labie (2001). Given its tremendous outreach in recent years, its future growth and financial sustainability depends on how well it is governed and if these corporate governance mechanisms are not followed it will result into collapse and closure of these MFIs.

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 practice in MFIs is important because of the significant resources they leverage in regard to poverty alleviation. Good corporate governance has been identified as a bottleneck to strengthen the financial performance of MFIs and increase outreach of microfinance Rock et al. (1998). The study is also warranted by the scarcity of empirical research about developing strong governance structures within MFIs that may improve their performance.

Microfinance institutions must achieve a balance between operating as a financial sustainable business and pursuing a mission of general interest: reducing financial exclusion. Corporate governance is related to an institution‟s internal operation and control procedures. It is also important to an institution because it plays a key role in creating transparency and trust for investors and in attracting capital for an institution.

Good corporate governance contributes to efficient management and to considering stakeholder interests, boosting the microfinance institution‟s reputation and integrity and fostering customer trust. Inefficiency in corporate governance standards for example limited board size, gender diversity, inadequate formal procedure of financial reporting and others are the main challenges facing the sector in Cameroon and it may upset the fast growth and also lead to poor financial performance of the microfinance institutions.

As a result, various corporate governance reforms have been specifically emphasized on appropriate changes to be made to the board of directors in terms of its composition and size.

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 industry in relation to corporate governance.

Therefore this necessitated the need to study the role of Corporate Governance on the financial performance of the microfinance industry given the tremendous growth of this industry. The empirical analysis of good corporate governance practices in relation to MFIs is still at an immature stage and it is important to conduct more studies in this field to enhance MFIs‟ development.

However, there is plenty of empirical evidence in the financial literature that supports the view that good corporate governance enhances the performance of a firm. The same rationale recommends that good corporate governance practices of MFIs would enhance their performance and reduce risk. Therefore, it is important to examine the empirical evidence of corporate governance mechanisms that improves firm performance.

Therefore, in order to understand the governance practices that contribute to enhance the financial performance of the MFIs in Cameroon, this study aimed to examine the role of corporate governance on the financial performance of MFIs in Cameroon. With this, the researcher therefore came up with the following research questions;

1. What is the impact of gender diversity of boards on the financial performance of a microfinance institution?
2. How does the size of the board affect the financial performance of a microfinance institution?
3. Does CEO duality influence the financial performance of a microfinance institution?
4. What impact does the independence of board of directors have on the financial performance of microfinance institutions?

1.3 Objectives of the Study

1.3.1 Main objective

The main objective of the study is to examine the role of corporate governance on the financial performance of microfinance institutions in Cameroon.

1.3.2 Specific objective

1. To examine the impact of gender diversity of boards on the performance of microfinance institutions.
2. To establish the effect of board size on the financial performance of microfinance institutions.
3. To examine the impact of CEO duality on the financial performance of microfinance institutions.
4. To ascertain the impact of independent board of directors on the financial performance of micro finance institution.