Financial Performance and Corporate Governance in Microfinance: Evidence from Vietnam

Thi H O Nguyen ,Manh Dung Tran ,Van Cuong Pham ,Thi Ngoc Yen Dang ,Thi Thu Nga Vu

doi:10.7176/ejbm/12-3-12

Abstract

Good corporate governance is considered a building block of success for microfinance institutions (MFIs) as it is presumed to help them in achieving their social and financial goals. This study analyzes the corporate governance and financial performance relationship for MFIs in Vietnam. We construct a corporate governance index based on seven measures pertaining to board size and composition, CEO characteristics, and ownership type. We then estimate the two-way relationship between this index and each of five different financial performance indicators. To address the likely simultaneity between corporate governance and financial performance, we adopt a two-stage least squares estimation approach with instrumental variables. The results confirm the endogenous nature of corporate governance and financial performance. We conclude that profitability and sustainability of MFIs improve with good governance practices and conversely that more profitable and sustainable MFIs have better governance systems. Keywords: Corporate governance, financial performance, microfinance. DOI : 10.7176/EJBM/12-3-12 Publication date: January 31 st 2020

Highlights

Poverty is a major problem in many developing countries including emerging countries and many efforts are being made by governments and institutional parties for overcoming it
All financial indicators except operating expense ratio (OER) are positively and highly significantly correlated with each others, which confirms that these indicators are various dimensions of financial performance broadly
We construct a firm-level index of corporate governance based on aspects of leadership and ownership structure that is tailored to the functioning of microfinance institutions (MFIs) in Vietnam

Summary

Introduction

Poverty is a major problem in many developing countries including emerging countries and many efforts are being made by governments and institutional parties for overcoming it. For many decades, subsidized credit was provided to the poor of the society as ‘cost of credit’ was considered a major problem faced by many poor people. Came the realization that the major concern of the poor was not the ‘cost of credit’ but ‘access to credit’ that non-access to credit and other financial services is a major obstacle to prosperity of poor people in developing countries (Hermes & Lensink, 2007), and Vietnam is not an exceptional case. Microfinance serves as a lifesaving instrument as it provides financial and social services to the underprivileged and excluded members of society, who have no access to traditional financial services offered by conventional financial institutions. Since microfinance institutions (MFIs), especially in Asia, were developed in response to prevailing poverty conditions, they have played a major role in economic and financial development. It is very important to investigate and bring advancement in microfinance

Methods

Results

Discussion

Conclusion