The Impact of Corporate Governance on Financial Performance of Microfinance Institutions. Case of the South West Region of Cameroon
Department: Accounting
No of Pages: 52
Project Code: ACC3
References: Yes
Cost: 5,000XAF Cameroonian
: $15 for International students
ABSTRACT
This
study examined the impact of corporate governance on financial performance of
MFIs. Despite the substantial theoretical development in the field of corporate
governance over the past decades, the gap between theory and practical still
needs to be reconciled, many MFIs close down due to the problem of governance.
A
cross sectional survey was utilized in the study, primary data was collected
using questionnaires. Descriptive, correlative and inferential statistic was
used to analyze the data. It has been
noticed that a significant relationship exists between management control and
economic profitability and the composition of the Board of Directors, its
structure and procedures on financial profitability.
Our
work constituted an attempt to find out the impact that corporate governance
has on the financial performance of microfinance institutions. The results of our
analyses showed that, the implementation of a sound management control
positively and significantly affects the economic profitability of MFIs, it has
a high correlation coefficient.
It
also showed that the financial profitability of microfinance institutions is
positively affected by the procedures and composition of the governing board of
directors. We strongly recommend that microfinance institutions should increase
the number of their board committees so that they can be able to effectively
take part in control, education of members and the sensitization of the general
public.
The
board should also communicate to members and shareholders how the resources of
the institution have been used.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The
idea of corporate governance is mostly common to banks and multinational firms.
Corporate governance has been an item of great importance on the policy agenda
in most developed countries for many years now. Further to this, the idea of
corporate governance is steadily gaining huge recognition in the African
continent.
The
rise in company failures and increased fraudulent activities in recent time
have led to significant pursuit in terms of literature and study of governance
principles to determine best codes of practices that will improve company
performance and going concern.
A
significant element in the pursuit of an effective corporate governance system
is the responsibility bestowed on the board of directors of the company. The
board is in place to supervise and monitor the activities of management and
also determine the strategic position of the company.
The
board appraises and approves management proposals, and they are the first and
most significant check for effective governance practices in the firm (Brennan,
2006 and Jonsson, 2005). Corporate governance is the procedure by which public
corporations are governed and monitored by the stakeholders: shareholders,
auditors, regulators, credit agencies, and so forth (Kim and Nofsinger, 2007).
It
is most often viewed as both the structure and the relationships which
determine corporate direction and performance. The relationship between good
governance and firm performance is widely argued by researchers.
Corporate
governance has become an important topic in developed countries after some
events such as frauds and company collapses. In recent years, it has also
attracted a great attention in developing countries. Many stock exchanges and
regulatory bodies issued directives regarding corporate governance mechanisms
and disclosures about them.
The
Cadbury report (1992) simply defines corporate governance as ‘the system by
which companies are directed and controlled’. In a report written for OECD, Iu
and Batten (2001) defined corporate governance as follows;
"Corporate
governance refers to the private and public institutions, including laws,
regulations and accepted business practices, which together govern the
relationship, in a market economy, between corporate managers and entrepreneurs
(corporate insiders) on one hand, and those who invest resources in
corporations, on the other".
Corporate
governance is especially important for publicly held companies with a large
shareholders group who are not engaged in the day-to-day operations and have no
direct access to inside information. Corporate governance is a framework which
specifies the responsibilities and rewards of the parties involved.
Although
some authors cite different theories as the background of corporate governance,
agency theory (Jensen, Meckling 1979) is regarded as the theoretical base of
the concept of corporate governance. There is an agency relationship between
shareholders (owners) and board of directors, corporate governance refers to the
mechanisms designed to resolve the problems arising in this relationship.
The
term ‘governance’ is different from ‘management’ and its root is ‘to govern’,
which means the administration of the State. However, management refers to the
day-to-day and long-term decisions in the fields of finance, operations,
marketing and so on.
Therefore,
governance is like bureaucratic administration of the company. Although both of
these concepts refer to different aspects of the company, the common point is
that they have a great importance on the success or failure of the company.
In
the literature, there are many studies about the relationship between different
fields of management and performance of the company. Similarly, the question of
whether corporate governance has any positive or negative effects on the
performance of the company has been a concern in the literature.
Corporate governance issues in both the private and public sectors have become a popular discussion topic in the last two decades (Hartarska 2005). There have been some legislative changes and provisions imposed by governments on public and private organizations around the world to improve on their governance arrangements.
It
is therefore necessary to point out that the concept of corporate governance of
MFIs and very large firms have been a priority on the policy agenda in
developed market economies for over a decade (Bassem 2009).
Further
to that, the concept is gradually warming itself as a priority in the African
continent. Indeed, it is believed that the relative poor performance of the
corporate sector in Africa have made the issue of corporate governance a
catchphrase in the development debate.
Several
events are therefore responsible for the heightened interest in corporate
governance especially in both developed and developing countries. Corporate
governance is a principal issue for improvement of economic potency that
involves relationships of shareholders, Board of directors, chief executive
officer and alternative stakeholders.
It
is instrumental in setting business objectives and provides tools to fulfil
goals and monitor performance. Performance measurement is one among the key
monetary problems in corporations. As many choices are created within and out
of doors of the corporate measurement monetary performance of firms is
extremely very important.
All
selections associated with investments, companies’ capital increment, agency
relationship and plenty of others are supported by measurement of
performance. In today's socio-economic
and political systems within the world, governance has become of crucial
importance. Most corporations have many owners that have no involvement in
managerial duties of individuals with equity in the firms.
Shareholders
are several, and a median investor holds a less significant part of the share
capital of an organization. In relation to this, such an investor tends to
require no interest to observe managers, who are then left to themselves and
may not act within the best interests of the owners of the entity.
Eventually,
equity homeowners could find that their investments have reduced in value due
to the recent collapse of profitability of banks in Africa as a whole. During
the economic crisis in the second half of the 1980s many African countries were
affected; especially Cameroon where the financial sector was greatly damaged.
The
banking sector became very suspicious after the crisis and could only give out
loans with adequate guarantee and for a very short period of time they could
manage. This encouraged the proliferation of many small saving and loans
institutions.
Microfinance
is the provision of financial services by registered entities which do not have
the status of banks or financial institution, to low-income clients or
solidarity lending groups including consumers and the self-employed, who
traditionally lack access to banking and related services.
MFIs
are the main facilitators of funding through the provision of micro credits,
though private equity, mutual funds, hedge funds and other organizations have
become important as they invest in various forms of debt. The field of
microfinance deals with time, money, risk and how they are interrelated.
Micro
financing can be traced back to an obscure experiment in Bangladesh about 40 years
ago owing to the works of Muhammed Yunus in 1976 who is known as the founder of
Grameen Bank and Nobel Peace Prize Winner of 2006.
According
to the Consultative Group to Assist the Poor (CGAP, 2006), microfinance is the
provision of basic financial services to impoverished clients who otherwise
lack access to financial institutions. Microfinance institutions help to reduce
poverty by providing the poor with sustainable credit facility to start small
businesses.
Three
features distinguish microfinance from other formal financial products viz: the
smallness of loans’ advances and or savings collected, the absence of asset
based collaterals, and simplicity of operations.
In
relation to the features of microfinance, the poor are more likely to lose
their money through fraud or mismanagement in informal savings arrangements
than are depositors in formal financial institutions.
The
movement of Microfinance in Cameroon has its roots in the year 1960s through
the creation of the first cooperative in 1963 by a Dutch Catholic father Alfred
Jensen in Njinikom; North-West region of Cameroon. This Cooperative is the
founding father of CAMCCUL (Cameroon Cooperative Credit Union League).
The
recent waves of corporate scandals in developed countries indicate that there
is much room for improvement of governance practices even in countries with
well-functioning markets and in industries with established mechanisms of control.
Investigating
corporate governance practices in microfinance institutions is important
because of the significant resources they leverage in regard to poverty
alleviation. Rock and al., (1998), good corporate governance has been
identified as a key bottleneck to strengthen the financial performance of MFIs
and increase outreach of microfinance.
Indeed,
it is believed that the Asian Crisis and seemingly poor performance of the
corporate sector in Africa have made the concept of corporate governance a
catchphrase in the development debate (Berglof and Von Thadden, 1999). It is
believed that practice of good governance by MFIs generates investor’s goodwill
and confidence.
1.2 Statement of the
Problem
Over
the last few decades, the business environment has evolved, registering
innumerable developments. These key developments include how organizations are
directed and controlled, the ownership and financing structure, aligning
organization’s strategies with environmental forces and stakeholder’s
engagement (Shleifer & Vishny, 1997; Dewji & Miller, 2013; Capital
Markets Authority (CMA), 2015).
Despite
these advancements, organizations are still faced with challenges such as the
separation of ownership and control (Jensen & Meckling, 1976; Shapiro, 2005)
this separation leads to emergence of governance issues where the three main
corporation’s stakeholders interplay.
These
are shareholders, directors and management, creating the structure of corporate
governance. Thus, corporate governance is a key driving force in a firm’s
performance. Since the last monetary distresses that occurred world over, the
influence of company there have been increased interests on the study of the
impacts of governance practices on the financial performance of banking
institutions.
The
lack of internal controls, weak company governance practices, weaknesses in
restrictive and superior systems, business executive loaning and conflict of
interest are factors behind the history of poor governance system within the
banking system during which has resulted to the autumn of the many monetary
establishments with others sinking receivership (Centre for company Governance
(CCG), 2004).
Despite
the measures place in situ by establishments like financial institution of
Republic of a study by Manyuru (2005) on governance structures of firms in
Africa and the corresponding increase in the returns on shares while a study by
Matengo (2008), focused on the association between governance activities of a
company and the actual outcomes, with the focus on African countries.
Due to the intermediateness of the outcomes of
the studies, it is necessary to conduct further studies to determine the
impacts of a company’s governance on the financial outcomes of financial
institutions.
While
there has been an interest on a study of governance structures of financial
institutions, there are still few empirical studies that have been conducted to
investigate the topic. There is also a limit to the understanding of the
concept of governance structure of financial institutions due to few published
materials.
Due
to limited studies on corporate governance policies in banks and their impacts
on financial outcomes of banks, shareholders have not gained the insight
regarding the policies that can be implemented to improve their returns on
investments.
Even
though many studies have been conducted to identify the relationship between
corporate governance practices and firm performance, there are limited
scholarly studies conducted for the microfinance sector of Cameroon in relation
to corporate governance. Kerubo, (2011) carried out a study based on corporate
governance practices in microfinance institutions and did not focus on its
impact on financial performance.
The
increasing emphasis in recent years on financial sustainability rather than on
social mission has led to allegations of mission drift among Microfinance
Institutions. It is in this context that the issue of corporate governance of
Microfinance institutions becomes increasingly relevant.
Consequently,
it is required that this topic should be tackled to determine the impacts of
Corporate Governance on financial performance. This study is based on the
question: What is the relationship between Corporate Governance policies and
the financial performance of microfinance institutions in the South West
Region, Cameroon?
1.3 Research Questions
- To what extent can corporate governance influence the financial performance of microfinance institutions in the South West Region, Cameroon?
Specifically
we have the following subsidiary questions
- To what extent can Board size influence the returns of assets of microfinance institutions?
- What is the incidence of women on board on the return on equity of MFIs?
- How can CEO – Chairman Duality affects the net profit margin of MFIs?
1.4 Objectives of the
Study
- The main objective of this study was to verify if corporate governance influences the financial performance of microfinance institutions.
Specific objectives are;
- To examine the relationship between board size and returns on assets of MFIs in the South West Region
- To determine the relationship between the number of women on board and returns on equity of MFIs in the South West Region
- To evaluate the effect of CEO – Chairman Duality on the net profit margin of MFIs
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