The influence of external governance mechanisms on the performance of microfinance institutions in Togo

Abstract

PurposeThis paper aims to assess the effects of external governance mechanisms on the performance of microfinance institutions (MFIs) in Togo.Design/methodology/approachUsing annual time series data from a sample of 30 MFIs during the period 2011–2015, the authors apply panel data econometrics in their estimations.FindingsThe results indicate that the notation by a rating agency positively and significantly affects the financial return of MFIs. The quality and the regularity of the audits negatively and significantly influence the financial performance (measured by return on assets and operating self-sufficiency) but favorably and significantly influence social performance (increased number of active borrowers (NAB) and reduced size of loans). Furthermore, supervision increases the amount of individual loans but decreases the NAB, which means deterioration in social performance. Overall, this paper shows that external governance mechanisms significantly affect the performance of Togolese MFIs, but with varying effects depending on the mechanism considered.Research limitations/implicationsThe sample size of 30 MFIs is small, and the geographic coverage of the study is restricted to MFIs operating in the city of Lomé, Togo. The authors did not have access to the information regarding the portfolio at risk at 30 days, even though it is a measure of financial performance. Likewise, we did not have access to the appendices to the financial statements for the calculation of prudential ratios. This method, which consists of asking the institutions using a questionnaire if they comply with prudential standards, may be biased because this study cannot verify the authenticity of the responses given that the standards are quantitative.Practical implicationsThe study findings advocate that improving the financial and social performance of MFIs requires improving the quality of external governance mechanisms. MFIs should then pay close attention to well-functioning external governance mechanisms.Social implicationsAs MFIs are key social actors in a society, all mechanisms that contribute to their efficiency benefit society.Originality/valueThis study contributes to the corporate governance literature by showing that external governance mechanisms influence performance. These external mechanisms are complementary disciplinary measures to internal governance mechanisms and other tools.