Sujani Thrikawala, Stuart Locke and Krishna Reddy
The purpose of this paper is to investigate the relationship between board structure, financial performance and outreach of microfinance institutions (MFIs) in Sri Lanka, using…
Abstract
Purpose
The purpose of this paper is to investigate the relationship between board structure, financial performance and outreach of microfinance institutions (MFIs) in Sri Lanka, using unbalanced panel data for 300 MFI-year observations for the period 2007 to 2012.
Design/methodology/approach
Empirical research relating to governance practices in MFIs is still in its infancy, and further studies are needed to determine how improved governance practices may enhance sustainability and outreach of MFIs, especially in emerging economies. The authors use regression techniques to examine whether board structure has an influence on MFI performance.
Findings
After controlling for internal corporate governance variables, regulatory status, size, age, leverage and year effects, the authors report that board structure does contribute to the financial performance and outreach of MFIs in Sri Lanka.
Research limitations/implications
The availability of data in the public domain captures the major MFIs but does constrain the generalisability of findings.
Practical implications
This study enables individual MFIs to evaluate potential restructuring of their boards to promote a dual mission and achieve a more accelerated economic development.
Social implications
The findings may encourage policy makers to promulgate policy guidelines to deepen MFI outreach to the poorest people.
Originality/value
Inconsistent findings in prior studies and a general lack of empirical results for the microfinance industry have led to an unclear message regarding corporate governance and MFI performance. This study fills the research gap, contributing to the existing corporate governance literature in the microfinance sector and providing evidence from an emerging economy.
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Sujani Thrikawala, Stuart Locke and Krishna Reddy
The purpose of this paper is to examine the relationship between corporate governance (CG) and microfinance institution (MFI) performance, using a dynamic panel generalised method…
Abstract
Purpose
The purpose of this paper is to examine the relationship between corporate governance (CG) and microfinance institution (MFI) performance, using a dynamic panel generalised method of moments (GMM) estimator to mitigate the serious issues with endogeneity.
Design/methodology/approach
Inconsistent findings and a general lack of empirical results for the microfinance industry leave an unclear message regarding the impacts of CG on MFI performance, especially in emerging economies. The authors use GMM estimation techniques to examine whether CG has an influence on MFI performance.
Findings
This study confirms that the MFIs’ contemporaneous performance and CG characteristics are statistically significantly positively linked with their past performance. This study finds statistically significant governance effects on MFI performance, including the presence of international directors and/or donor representatives on the board, client representatives on the board, percentage of non-executive directors and the quality of the national governance system.
Practical implications
These findings provide some insights for policy-makers and practitioners to develop suitable policies and guidelines to streamline MFIs’ operations in emerging countries. Moreover, national and international investors and donors may use these finding as a benchmark for their investment and funding decisions.
Originality/value
This paper is the first to estimate the CG and performance relationship of MFIs in a dynamic framework by applying the GMM estimation method. This approach improves upon traditional estimation methods by controlling the likely sources of endogeneity. Further, this paper examines whether quality of national-level governance characteristics is related to performance measures of profitability and outreach of MFIs.