Microfinance board and default risk in sub-Saharan Africa

Abstract

Purpose

This paper examines whether board structure affects microfinance institutions' (MFIs) default risk in sub-Saharan Africa (SSA).

Design/methodology/approach

The paper uses a pooled OLS and system generalized method of moments (GMM) model on unbalanced panel data from 214 MFIs in 26 SSA countries over 2005–2016 period. Default risk is measured using non-performing loans (loans overdue 30 and 90 days) and loans written-off ratios. Board size, proportion of independent and female directors are used as proxies for board structure.

Findings

The empirical results indicate that unregulated MFIs with larger and more independent boards tend to have a lower default risk. In addition, unregulated MFIs with a female director tend to lower default risk.

Research limitations/implications

This research mainly focusses on SSA. Future research may consider a broader geographical area.

Practical implications

Poor loan portfolio quality is one of the major problems of MFIs operating in SSA. The findings of this study will contribute in emphasizing the role of an effective board structure in lowering MFI default risk.

Originality/value

This study is unique in terms of investigating whether board structure impacts default risk based on MFI regulation.

Citation

Tadele, H. (2021), "Microfinance board and default risk in sub-Saharan Africa", African Journal of Economic and Management Studies, Vol. 12 No. 1, pp. 1-17. https://doi.org/10.1108/AJEMS-01-2020-0040