ABSTRACT
This study examined the relationship between corporate governance and performance of the microfinance industry in Ghana. The study used fixed effect panel data regression analysis. The specific objectives were to identify the key corporate governance components within the microfinance sector, analyse the effect of recognised corporate governance practices on Tobin’s Q of MFIs, and also to analyse the effect of recognised corporate governance practices on R OA of MFIs. The corporate governance characteristics were board size, CE O duality, board composition, and board diversity. According to the results, the mean ratio of Tobin’s Q is 0.682, implying that on the average a lot of the microfinance firms are not doing well at all. The suggestion here is that these firms are barely breaking even. The maximum Tobin’s Q indicating performance is shown to be 156% and the minimum as low as 13%. The Return on Assets (R OA) shows a wide variation between firms. The mean performance of MFIs relative to R OA is shown to be 21%, with the minimum being -75%, with the maximum being 78%. The regression analysis also found that board size and board diversity had a positive impact on firm performance, while CE O duality and board composition had a negative impact on firm performance. There was evidence to show that most of the MFIs in Ghana adopted the two-tier board structure, where different people occupied the CE O and chairmanship positions. The study also found most of the MFIs to be relying more on debt financing and that the debt structure impacted positively on firm performance. The study found mixed results with regards to corporate governance characteristics and the performance of MFIs in Ghana, but it is undoubtedly clear that corporate governance structures have impact on the performance of MFIs in Ghana
CHAPTER ONE
INTRODUCTION
Background of the Study
The purpose of this study is to examine the effect of some corporate governance characteristics on the performance of microfinance institutions (MFIs) in Ghana. For some time now, firms have come to the realisation of how good governance promotes higher returns and consequently improves on the level of confidence of these firms. It has also been identified that the nature and characteristics of corporate governance structures do have a strong effect on both internal and external factors that seek to affect the performance of the firm (Kyereboah-Coleman & Biekpe, 2005).
It should be noted however that the developed market economies have over the decades made corporate governance a priority policy agenda. In recent times however, the concept is warming itself as a priority policy area in developing economies. According to Berglof & von Thadden (1999) the concept of corporate governance was made popular after the Asian Financial Crisis and in Africa, it has been a popular concept due to the poor performance of firms on the continent. There are studies that have identified how corporate governance has increased the value of firms by boosting the bottom line of firms. Gompers et al (2003) for instance found that companies with strong shareholder rights yielded 8.5% more annual returns than firms with weak rights. The study again concluded that firms that were more democratic enjoyed high profits, high valuations, high sales and growth and low capital expenditures. Firms with poor governance systems are less profitable and have high risk of bankruptcy, low valuations, pay less dividends,
whereas the reverse apply to firms with very good governance systems. They tend to enjoy high profits, low bankruptcy risks, high valuations, and high dividend payouts.
Another study by Claessens (2003) also affirms that firms are able to get greater access to financing, lower capital cost, high performance and better treatment of all stakeholders when the firm has a better corporate governance framework. Apart from experiencing poor performance and risky financing patterns, firms with very poor governance framework create a favourable environment for microeconomic crisis like what took place in Asia in the 1990s and the United States in 2007. Donaldson (2003) has also identified how corporate governance is key in creating a greater investor confidence and market liquidity.
Bassem (2009) defined microfinance as the provision of financial and non-financial services to the rural poor who are mostly classified as unbankable. These people’s exclusion has been primarily due to their levels of poverty and requirement by banks, which at most serve as barriers to their inclusion. The evolution of microfinance has been a direct response to the efforts of individuals, organisations and agencies at ensuring that the poor get access to credit. In their attempts at fulfilling their core mandate of reaching out to poor borrowers and also being financially sustainable, the issue of governance has become a critical issue that can either engender or stifle the growth of MFI institutions. In fact, apart from ensuring that their social goals are reached, governance and financial sustainability of MFIs have become an overriding concern due to the shrinking resource base for donor funds, which was a major financing source for MFIs. The implication is that MFIs have to support themselves (Ledgerwood, 1999). As have been noted in the previous paragraphs, governance systems and frameworks have direct implication for the sustainability of MFIs in meeting their social goals (Labie, 2001).
Statement Of The Problem
The overwhelming international growth of the microfinance industry has been attributed to the huge interest in accessing services provided by the sector (Thrikawala, 2016). Ming- Yee (2007) makes the assertion that about 10,000 MFIs issue out loans worldwide as of 2007. According to data provided by the Microcredit Summit Campaign (MSC) Report of 2009 indicate that about 204 million of the poorest clients have been reached at the end of 2012 (MSC, 2014). This figure had increased to 211 million in 2013. The phenomenal growth had meant that there was going to be intense competition among MFIs which may serve as basis for unfair practices and poor transparency issues due to poor or lack of governance.
In MFI literature, it has been noted by researchers such as Mersland & Strøm (2009); Cull et al. (2007); Gant, de Silva, Atapattu, & Durrant (2002); Hartarska (2005); Labie, 2001; Rock et al (1998); van Greuning, Gallardo, & Randhawa (1998), that good governance has been one of the critical elements used in strengthening stewardship as well as achieving MFI primary goals and promoting higher growth of the industry. It has also been established that achieving financial self-sufficiency and at the same time deliver its social mandate to lowincome clients has been a difficult task for many MFIs. Good governance practices allow MFIs to have efficient and transparent operations. According to the Centre for t he Study of Financial Innovation (CSFI, 2008), one of the most difficult areas in the microfinance industry is corporate governance practice, and that it is a pressing issue among policy makers.
In the extant literature, there are very scanty studies that consider the relationship between corporate governance practices and microfinance sector. In fact, very few studies exist on the direct relationships between corporate governance and MFI
performance. The few that exist, report of conflicting results. Despite the scanty studies however, there is the general understanding among practitioners that when there is an improved corporate governance practices it induces higher MFI profitability ( Bassem, 2009; Cull et al., 2007; Hartarska, 2005; Hartarska & Nadolnyak, 2007; Mersland,
2009).
There is therefore the pressing need for an empirical study on the relationship between MFIs and corporate governance to establish how some of these corporate governance characteristics affect firm performance, especially in the contest of a developing economy such as Ghana. In this context therefore, this study seeks to examine the relationship that exists between corporate governance practices and performance in the microfinance sector in Ghana.
Objectives of the Study
The general objective of the study was to examine the relationship between corporate governance and performance of the microfinance industry in Ghana. However, the specific objectives are to:
- Identify the key corporate governance components within the microfinance industry in Ghana.
- Analyse the effects of recognised corporate governance practices on Tobin’s Q of MFIs in Ghana.
- Analyse the effects of recognised corporate governance practices on R OA of MFIs in Ghana.
Research Questions
In order to achieve the research objectives the study seeks to answer the following research questions:
- What are the key corporate governance components within the microfinance industry in Ghana?
- What are the effects of corporate governance practices on Tobin’s Q of MFIs in Ghana?
- What are the effects of corporate governance practices on R OA of MFIs in Ghana?
Significance of the Study
The significance of this study is broad and diverse. First of all the concept of good governance and how it interacts with microfinance profitability has not been well explored in the context of Ghana. In fact, there is almost no known study to this effect. This study therefore fills the knowledge gap in the extant corporate literature by adding to the body of theory on how this effect of the relationship pertains in sub-Saharan Africa. Furthermore, Ghana’s financial market compared to that of the developed economies is not mature and therefore possesses very ineffective corporate controls. It is therefore important to investigate how this internal corporate governance structure affects the financial performance of MFIs. At this period where reports of the collapse and insolvency of some financial institutions abound in Ghana, the opportunity to delve into the potential cause of the poor performance or otherwise is critical
