Does Corporate Governance (CG) impact the Financial Performance of Microfinance Institutions (MFIs)? Evidence from South Asia
ABSTRACT
Manuscript type: Empirical
Research Question/Issue: This study utilises agency theory and resource dependency theory
to examine the relationship between corporate governance (CG) practices and financial performance of Sri Lankan microfinance institutions (MFIs). Since earlier corporate governance studies have focussed on for-profit organisations and developed countries, the generalisability of their findings cannot be extended across national boundaries because of the existence of different institutional environments (regulatory, cultural and economic environments).
Research Findings/Insights: Using six years of unbalanced panel data for 300 firm-year observations for the period 2007 to 2012, we find that financial performance of Sri Lankan MFIs improves when there is a female CEO, a female chair, an internal auditor reporting to the board and client representation on the board. Our results also show a statistically significantly negative relationship between female directors on a board, the number of board members and the financial performance of MFIs in Sri Lanka, thus suggesting that board composition is not at an optimal level.
Theoretical/Academic Implication: The empirical studies relating to good CG practices in MFIs is still in its infancy and further studies are needed to find out how improved CG practices will improve profitability and sustainability of microfinance institutions. This study encompasses agency theory, resource dependency theory and empirical research to determine how CG practices may enhance financial performance in the microfinance sector.
Practitioner/Policy Implications: Our findings suggest that MFIs with low levels of financial performance will be able to improve their performance by electing local male
representatives to their boards. This study will enable individual MFIs to restructure their boards and may promulgate policy guidelines by the government to build better outcomes.
This research provides insight for policy-makers regarding CG in Sri Lankan MFIs.
Keywords: Corporate Governance (CG), Financial Performance, Microfinance Institutions
(MFIs), Panel Data, Sri Lanka