Abstract

The purpose of this study was to determine the effect of corporate governance on the financial performance of microfinance institutions. Despite significant theoretical advancements in the field of corporate governance over the last decades, the gap between theory and reality remains unresolved, and many MFIs close owing to governance issues.

The study employed a cross-sectional design and collected primary data using questionnaires. The data were analyzed using descriptive, correlation, and inferential statistics. It has been observed that there is a substantial relationship between management control and economic profitability, as well as between the makeup, structure, and processes of the Board of Directors and financial profitability.

Our research sought to determine the effect of corporate governance on the financial performance of microfinance organizations. Our findings revealed that implementing sound management controls has a favorable and significant effect on the economic profitability of MFIs, as evidenced by a strong correlation coefficient.

Additionally, it demonstrated that the methods and makeup of the governing board of directors had a good effect on the financial profitability of microfinance companies. We highly propose that microfinance institutions enhance the size of their board committees in order to effectively participate in control, member education, and public sensitization. Additionally, the board should disclose to members and shareholders how the institution’s resources have been utilised.

PART ONE

INTRODUCTION

1.1The Study’s Context

Corporate governance is primarily associated with banks and international corporations. Corporate governance has been a high priority on the policy agendas of the majority of developed countries for many years. Additionally, the concept of corporate governance is gaining significant traction across the African continent.

Numerous recent events have resulted in an upsurge in the adoption of inadequate corporate governance policies across the globe. The rationale for establishing good governance principles received broad awareness following a time of complete ambiguity sparked by a number of high-profile failures.

Recent increases in corporate failures and fraudulent activity have prompted a significant pursuit of research and study of governance concepts in order to identify ideal codes of conduct that would improve firm performance and viability.

A critical component of establishing a successful corporate governance structure is the duty placed on the company’s board of directors. The board of directors is responsible for supervising and monitoring management’s activities, as well as determining the company’s strategic positioning.

The board evaluates and accepts management recommendations, serving as the first and most important check on the firm’s governance processes (Brennan, 2006 and Jonsson, 2005).

Corporate governance is the process by which public organizations are regulated and supervised by their constituents: shareholders, auditors, regulators, and credit rating agencies (Kim and Nofsinger, 2007).

It is frequently considered as both the structure and the connections that govern the direction and performance of a business. Researchers frequently claim that there is a link between excellent governance and corporate performance.

Corporate governance has gained prominence in industrialized countries as a result of recent occurrences such as frauds and firm failures. It has also garnered considerable interest in recent years in poorer countries.

Numerous stock exchanges and regulatory agencies have issued directives on corporate governance processes and their disclosure. Corporate governance is simply defined in the Cadbury report (1992) as ‘the structure through which businesses are managed and regulated.

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, that collectively govern the relationship between corporate managers and entrepreneurs (corporate insiders) on the one hand, and those who invest in corporations on the other, in a market economy.”

Corporate governance is critical for publicly traded organizations with a sizable shareholder group that is not involved in day-to-day operations and does not have direct access to inside information. Corporate governance is a structure that establishes the roles and obligations of all parties.

While some authors attribute corporate governance to a variety of theories, agency theory (Jensen, Meckling 1979) is often considered as the theoretical foundation for the concept of corporate governance. Between shareholders (owners) and the board of directors, there is an agency relationship; corporate governance refers to the processes in place to address conflicts that arise in this relationship.

The term ‘governance’ is distinct from the management; its source implies ‘to govern,’ referring to the administration of the State. However, management refers to both short- and long-term decisions made in the areas of finance, operations, and marketing. Thus, governance is analogous to the company’s bureaucratic administration.

While each of these concepts applies to distinct parts of the business, they have one thing in common: they are critical to the company’s success or failure. Numerous studies have been conducted on the relationship between various aspects of management and the performance of the business.

Similarly, the literature has debated whether corporate governance has a beneficial or negative effect on a company’s performance. Corporate governance issues have become a prominent topic of discussion in both the commercial and public sectors during the last two decades (Hartarska 2005). Governments have imposed a number of legislative modifications and provisions on public and commercial organizations worldwide in order to strengthen their governance systems.

It is therefore vital to emphasize that for more than a decade, corporate governance of MFIs and extremely large enterprises has been a top policy focus in developed market economies (Bassem 2009).

Additionally, the concept is increasingly establishing a foothold as a priority on the African continent. Indeed, it is claimed that Africa’s business sector’s comparatively poor performance has elevated the subject of corporate governance to a buzzword in the development discussion. Numerous events have contributed to the increased interest in corporate governance, particularly in developed and emerging countries.

Corporate governance is a critical issue for economic growth since it involves the interactions between shareholders, the board of directors, the chief executive officer, and other stakeholders. It is critical in establishing corporate objectives and providing instruments for achieving them and monitoring performance. Performance measurement is a critical financial issue for businesses. As numerous choices are made both within and outside of the corporation, financial performance of businesses is critical.

All investment decisions, company capital growth, and agency relationships, to name a few, are backed up by performance measurement. Governance has become critical in today’s socioeconomic and political systems worldwide.

The majority of organizations have numerous owners who are uninvolved in the managerial responsibilities of persons who own equity in the firms. There are several shareholders, and the average investor owns a relatively small portion of an organization’s stock.

In this regard, such an investor typically has little reason to observe management, who are therefore left to their own devices and may behave against the best interests of the entity’s owners. Eventually, equity homeowners may discover that their investments have lost value as a result of the recent drop in the profitability of African banks in general.

Several African countries were impacted by the economic crisis in the second half of the 1980s, most notably Cameroon, which suffered significant damage to its banking sector. After the crisis, the banking sector became extremely skeptical and could only make loans with adequate guarantees and for a very short period of time.

This facilitated the growth of several tiny savings and loan associations. Microfinance is the provision of financial services by registered businesses that are not banks or financial institutions to low-income clients or solidarity lending groups, such as consumers and self-employed individuals, who have historically lacked access to banking and related services.

While microfinance institutions are the primary source of funding through the supply of microcredits, private equity, mutual funds, hedge funds, and other organizations have grown in importance as they invest in other forms of loans. Microfinance is concerned with time, money, and risk, as well as their interrelationship.

Microfinance dates all the way back to an obscure experiment in Bangladesh approximately 40 years ago, courtesy of Muhammed Yunus’s 1976 work as the founder of Grameen Bank and 2006 Nobel Peace Prize laureate.

Microfinance, as defined by the Consultative Group to Assist the Poor (CGAP, 2006), is the provision of essential financial services to underprivileged clients who lack access to traditional financial institutions. Microfinance

Institutions contribute to poverty reduction by giving the poor with long-term finance to launch small companies. Microfinance is distinguished from other formal financial products by three characteristics: the modest size of loans and/or savings collected, the absence of asset-based collateral, and the simplicity of operations.

In comparison to depositors in informal financial institutions, the poor are more likely to lose their money through fraud or mismanagement in informal savings arrangements.

Microfinance in Cameroon began in the 1960s with the establishment of the country’s first cooperative in 1963 by a Dutch Catholic priest named Alfred Jensen in Njinikom, Cameroon’s North-West area. This Cooperative is credited with launching CAMCCUL (Cameroon Cooperative Credit Union League).

Recent waves of corporate scandals in industrialized countries demonstrate that even in countries with well-functioning markets and established means of control, governance practices can be significantly improved.

Investigating microfinance companies’ corporate governance standards is critical given the enormous resources they devote to poverty eradication. According to Rock et al. (1998), excellent corporate governance is a critical barrier for strengthening MFIs’ financial performance and expanding microfinance’s reach.

Indeed, it is claimed that the Asian Crisis and the seeming underperformance of Africa’s corporate sector have elevated the concept of corporate governance to a catchphrase in development discourse (Berglof and Von Thadden, 1999). MFIs are supposed to build investor goodwill and confidence through their practice of good governance.

1.2 Problem Statement

The business environment has grown significantly during the last few decades, reflecting many changes. These significant developments include changes in how organizations are directed and controlled, their ownership and financing structures, their alignment with environmental forces, and their engagement with stakeholders (Shleifer & Vishny, 1997; Dewji & Miller, 2013; Capital Markets Authority (CMA), 2015).

Despite these improvements, businesses continue to confront obstacles such as ownership and control separation (Jensen & Meckling, 1976; Shapiro, 2005). This separation results in the emergence of governance concerns involving the interaction of the corporation’s three primary stakeholders.

These are the shareholders, directors, and management who collectively form the corporate governance system. As a result, corporate governance is a critical factor in a firm’s performance. Since the recent global financial crisis, there has been a surge in interest in the study of the effects of governance policies on the financial performance of banking organizations.

Lack of internal controls, lax corporate governance practices, flaws in restrictive and superior systems, business executive lending, and conflict of interest all contribute to the banking system’s history of poor governance, which has resulted in the demise of numerous financial institutions, with others sinking into receivership (Centre for company Governance (CCG), 2004).

Despite the measures implemented by institutions such as the Republic of Congo’s financial institution, a study by Manyuru (2005) on the governance structures of firms in Africa and the resulting increase in returns on equity, while a study by Matengo (2008) examined the relationship between a company’s governance activities and its actual outcomes, with a focus on African countries.

Due to the amorphous nature of the findings, additional research is required to ascertain the effects of corporate governance on the financial outcomes of financial institutions.

While there has been interest in the study of financial institution governance systems, there have been very few empirical research on the subject. Additionally, there is a limitation to the understanding of the notion of financial institution governance structure due to the scarcity of published resources.

Due to the scarcity of research on bank corporate governance rules and their impact on financial results, shareholders lack insight into the policies that can be enacted to increase their returns on investments.

While numerous studies have been undertaken to determine the relationship between corporate governance practices and firm performance, there are few scholarly studies on corporate governance in the Cameroonian microfinance sector.

Kerubo (2011) conducted a study on corporate governance practices in microfinance institutions, but did not examine their financial performance impact. Recent years’ increased emphasis on financial sustainability over social mission has resulted in claims of mission drift among microfinance institutions.

Corporate governance of microfinance institutions becomes increasingly relevant in this environment. As a result, this subject must be addressed in order to ascertain the impact of Corporate Governance on financial performance.

The purpose of this study is to determine the association between corporate governance policies and financial performance of microfinance institutions in Cameroon’s South West Region.

1.3 Research Issues

How much can corporate governance have an effect on the financial performance of microfinance institutions in Cameroon’s South West Region?

We have the following secondary queries in particular.

To what extent may the size of a microfinance institution’s board of directors affect the returns on its assets?

What is the impact of women on MFIs’ return on equity?

How does CEO – Chairman Duality impact MFIs’ net profit margins?