The Effect of Corporate Governance Mechanism on the Financial Performance of Microfinance Institutions: Evidence from Ethiopian Microfinance Institutions

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