Abstract
The study was aimed to examine the effect of corporate governance attributes on the financial performance of MFIs. Explanatory research design with mixed research approach was employed to carry out the study. From 12 legally registered microfinance institutions at NBE and operating in Addis Ababa city administration, 7 MFIs was purposively selected to investigate the effect of corporate governance variables such as board size, board educational qualification, board experience in the financial sector, meeting frequency of the board, board audit committee size and board independency on the financial performance of MFIs measured by Return on Equity and Operational Self Sufficiency. In addition to main explanatory variables, control variables such as MFIs size, leverage and MFIs age were also included in the study variables. Both primary and secondary data were used in which primary data regarding board characteristics was collected through questionnaire and secondary data was obtained from NBE and AEMFI. Panel data covering six year from 2010-2015 was analyzed for seven microfinance institutions. The regression results revealed that board size, board educational qualification, meeting frequency, board independency and MFIs age have positive and significant relationship with financial performance; whereas board experience in the financial sector and board audit committee size has statistically negative association with MFIs’ financial performance. Leverage and the size of microfinance institutions do not have significant impact on the financial performance of Microfinance Institutions. Based on empirical result of the study, it is recommended that board audit committee sizes should be kept low. Furthermore, in order to reduce the problem of management failures which put at risk the money obtained from government and other sources, the governance system of MFIs have to be effective. Keywords: Corporate Governance Mechanisms, Agency Theory, Financial Performance, MFI DOI : 10.7176/RJFA/10-21-03 Publication date: November 30 th 2019
Highlights
According to the Organization for Economic Cooperation and Development (2004), corporate governance is set of rules that define the relationship between stakeholders, management, and board of directors of a company and influence how that company is operating
This study presented the first evidence on the link between governance mechanisms and financial performance in microfinance institutions
As this study revealed, large size of an audit committee negatively affects performance and may not play its role effectively in mitigating the risk of fraud and misrepresentation of the information and improve monitoring and transparency in operations which lead to timely and accurate reporting of the loan defaults and poor performance in an MFI
Summary
According to the Organization for Economic Cooperation and Development (2004), corporate governance is set of rules that define the relationship between stakeholders, management, and board of directors of a company and influence how that company is operating. A few studies were conducted in Ethiopia on the effect of corporate governance on the financial performance of microfinance institutions (Wolday, 2008; Belete, 2015; & Eyob, 2016). They took corporate governance variables such as board size, board gender composition, board competence, and board experience in the financial sector, meeting frequency, size of the audit committee, CEO duality and CEO gender as variables which affect the financial performance of microfinance institutions measured by ROA and ROE. There was no previous study that examined the effect of corporate governance mechanism on financial performance of MFIs measured by OSS in Ethiopia.
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