Effect of Corporate Governance on Microfinance Institutions Financial Performance in Ethiopia

Abstract

The microfinance sector in Ethiopia is not yet proved to be a profitable business that attracts commercial investors. Most of the shareholders of the MFIs are regional governments, associations and NGO's. Recently directive has been issued, which allow MFIs to transform to banks that give MFIs an opportunity to move to the trajectory of full commercialization with the argument of profit motive to be self-sustainable and address other mission. This indicates that commercialization is currently big concern of MFIs in Ethiopia. Thus, the objective of this research project was to identify the effect of corporate governance on financial performance of MFIs in Ethiopia. Explanatory research design was employed to examine the effect of corporate governance practices such as board size, board sub-committee, numeration, and competence of boards and CEO on financial performances (measured by ROA) of MFIs. From the total 34 registered members of AEMFIs, three years data of 25 MFIs taken from secondary and primary source was analyzed. The result of regression analysis reveals that out of six corporate governance variables and one control variable identified for the study, three explanatory variables have found significant effect on financial performance of MFIs in Ethiopia. Effect of board of directors (BoDs) member size, educational level of boards of BoDs, industry experience of Chief Executive Officer (CEO) on ROA is positive but not significant. Numerations for BoDs, CEO education level and MFIs Scale have positive effect on ROA and statically significant at 5%, 5% and 1% level. The result also reveals that the overall fixed effect regression model is significant at 1% level and adjusted R square is 0.504 implies that the over effect of the corporate governance variables included in the study is significant and jointly explain 50.4% of financial performance of MFIs in Ethiopia.  As a result, due attention need to be given for these corporate governance practices to attain required level financial performance and insure sustainability through commercialization.

Keywords: Microfinance, corporate governance practices, financial performance, Ethiopia

DOI: 10.7176/RJFA/12-13-04

Publication date:July 31^st 2021