Microfinance board and default risk in sub-Saharan Africa

Abstract

PurposeThis paper examines whether board structure affects microfinance institutions' (MFIs) default risk in sub-Saharan Africa (SSA).Design/methodology/approachThe paper uses a pooled OLS and system generalized method of moments (GMM) model on unbalanced panel data from 214 MFIs in 26 SSA countries over 2005–2016 period. Default risk is measured using non-performing loans (loans overdue 30 and 90 days) and loans written-off ratios. Board size, proportion of independent and female directors are used as proxies for board structure.FindingsThe empirical results indicate that unregulated MFIs with larger and more independent boards tend to have a lower default risk. In addition, unregulated MFIs with a female director tend to lower default risk.Research limitations/implicationsThis research mainly focusses on SSA. Future research may consider a broader geographical area.Practical implicationsPoor loan portfolio quality is one of the major problems of MFIs operating in SSA. The findings of this study will contribute in emphasizing the role of an effective board structure in lowering MFI default risk.Originality/valueThis study is unique in terms of investigating whether board structure impacts default risk based on MFI regulation.