RÉPUBLIQUE DU CAMEROUN REPUBLIC OF CAMEROON

Paix – Travail – Patrie Peace – Work – Fatherland

************* *************
MINISTERE DE L’ENSEIGNEMENT SUPERIEUR MINISTRY OF HIGHER EDUCATION
************* *************
UNIVERSITÉ DE DOUALA UNIVERSITY OF DOUALA
******* *******

FACULTY OF ECONOMICS AND

APPLIED MANAGEMENT SCIENCES
(F.S.E.G.A)

OPTION: FINANCIAL MANAGEMENT

CORPORATE GOVERNANCE AND FINANCIAL

PERFORMANCE IN MICROFINANCE INSTITUTIONS:
THE CASE OF NORTH WEST REGION, CAMEROON

A dissertation submitted in partial fulfillment of the requirements for the award of a

post graduate Diploma in management sciences.
Presented and Defended by:
NCHENDEH CHRISTIAN
(+237) 674101690
[email protected]

Directed by: Jury:

Pr. ESSOMBA AMBASSA CLAUDE PRESIDENT :
Maitre de conférences en sciences de gestion
REPORTER :

MEMBER 1 :

MEMBER 2 :
 BRIEF CONTENTS

GENERAL INTRODUCTION …………………………………………………………………... 1

PART ONE: CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE

AS MARRIED THEORETICAL CONCEPTS ………………………………….. 7

CHAPTER ONE: CORPORATE GOVERNANCE: THE PIN CODE OF

MICRO FINANCIAL INSTITUTIONS IN CAMEROON ………………….. 9

SECTION I: THE NOTION OF CORPORATE GOVERNANCE ………………………………. 9

SECTION II: THE BIRD EYE VIEW OF MFIs IN CAMEROON……………………….……… 17

CHAPTER TWO: THE RELATIONSHIP BETWEEN CORPORATE

GOVERNANCE AND FINANCIAL PERFORMANCE ……………………. 26

SECTION I: CORPORATE GOVERNANCE: AN ABERRATION……………………………... 26

SECTION II: THE INCIDENCE OF CORPORATE GOVERNANCE

ON FINANCIAL PERFORMANCE……………………….………………………. 35

PART TWO: THE IMPACT OF CORPORATE GOVERNANCE ON THE

FINANCIAL PERFORMANCE OF MFIs IN NORTH WEST REGION…….. 43

CHAPTER THREE: METHODOLOGY IN THE APPRAISAL OF MFI GOVERNANCE……. 45

SECTION I: DESCRIPTION OF RESEARCH DESIGN……………………….………………... 45

SECTION II: DATA ANALYSIS AND CHARACTERISTICS OF POPULATION……………. 54

CHAPTER FOUR: THE EMPIRICAL INCIDENCE OF CORPORATE

GOVERNANCE ON FINANCIAL PERFORMANCE……………………... 61

SECTION I: APPRAISAL OF GOVERNANCE AND PERFORMANCE IN MFIs……………. 61

SECTION II: THE INFLUENCE OF GOVERNANCE ON PERFORMANCE IN MFIs……… 68

 DEDICATION

To
My entire family
 ACKNOWLEDGEMENTS

As commonly said “One hand can never tie a bundle”, we could not on our own carry
out this research to the end without the academic, moral, material and financial support from
those very special to us. In this respect, I will like to wholehearted give special thanks to all
those who have contributed in one way or the other for this our project to come to a
successful end.

My unreserved gratitude goes to my project director, Pr. ESSOMBA AMBASSA

CLAUDE, Senior Lecturer FSEGA and vice dean in charge of academics, who sacrificed his
precious time, despite his entire charged up program, to offer me his academic and moral
support for the success of this project;

I remain profoundly grateful to Dr. NOCHEH Dieudonné for his time and energy
sacrificed to orientate me on this work.

My sincere gratitude is extended first to the administration and staff of FSEGA

especially those in the SECO department for their contribution in one way or the other which
has lend me the opportunity to present my end of studies project.

Special thanks to my entire family, especially to my lovely and caring mother Mme.
ATECHUPE GRACE for her care and supports of all nature from childhood till date.

Special thanks also go to Mme. TANTOH JUSTINE and the husband Mr. TANTOH
HENRY for all their spiritual, financial and moral support that they have given me
throughout my staying in Douala.

I extend my gratitude to my siblings, Fosoh Mirabel, Fosoh Collect, Fosoh Richard,

Fosoh Kelly, Fosoh Rapheal, and Ndasi Emanuel; my friends, Che Elvis Shu, Niba
Laurentine Bih and all my classmates and friends who gave me the necessary support.

My profound gratitude to the Almighty God who, without Him I would have not been
even alive to write the project in the first place.
 LIST OF TABLES AND FIGURES
LIST OF TABLES
NUMBER TITLE Page
Table 01: The principles of corporate governance …………………………………………………………....... 13
Table 02: The importance of corporate governance …………………………………………………………… 14
Table 03: Conditions for Categorization of MFIs in Cameroon ………………………………………………. 20
Table 04: Services offered by MFIs in Cameroon ……………………………………………………………… 21
Table 05: Identification of variables …………………………………………………………..……………….... 48
Table 06: Operationalisation of concepts……………………………………………………...………………… 49
Table 07: Category of Microfinance institution ……………………………………………...………………… 57
Table 08 : Location of the institution in the North West region ……………………………..………………… 57
Table 09: Period of creation of the institution ………………………………………………..………………… 57
Table 10: Nature of members in the microfinance institution ………………………………………………… 58
Table 11: Your position in the organization ………………………………………………….………………… 58
Table 12: Analysis of questionnaire distributed ……………………………………………...………………… 60
Table 13 : Number of board members (Board size) …………………………………………..………………… 62
Table 14 : Board member’s experienced profile ……………………………………………...………………… 62
Table 15 : Appraisal of number of women on the board ……………………………………..………………… 63
Table 16 : Distribution by the size of the audit committee …………………………………...………………… 64
Table 17 : Presence of management information system as a control tool ………………….………………… 64
Table 18 : Regularity of updating the manual of procedures ………………………………..………………… 64
Table 19: Regularity of verification of cash vault ……………………………………………………………… 65
Table 20: Number of Board member with a college degree …………………………………………………… 65
Table 21: Board members with business management experience …………………………………………… 66
Table 22: Evaluation of the internal control system …………………………………………………………… 67
Table 23: Degree of effectiveness of management control …………………………………..………………… 67
Table 24: Degree of effectiveness of internal control ………………………………………...………………… 67
Table 25: Correlation table ……………………………………………………………………………………… 70
Table 26: Regression model of H1 ……………………………………………………………..………………… 72
Table 27: Regression model ……………………………………………………………………………………… 73
Table 28: Regression model of H2 ……………………………………………………………..………………… 74

LIST OF FIGURES
NUMBER DESCRIPTION PAGE
Figure 01: Research model ……………………………………………………………..……………………….... 50
 LIST OF ACRONYMS

ABBREVIATIONS FULL MEANING

BOD Board Of Directors
CAMCCUL Cameroon Cooperative Credit Union League

CAPCOL Caisse Populaier Cooperative du Littoral

CEMAC Central African Economic and Monetary Community

CEO Chief Executive Officer

COBAC Central African Banking Commission

COFINEST Companie Financiére de L’Estuaire

CVECA Caisses Villageoise d’Epargne et de Crédit

FIFFA First Investment for Financial Assistance

GDP Gross Domestic Product

GOS Gross Operating Surplus

H1 Hypothesis one

H2 Hypothesis two

MC2 Mutuelles Communautaire de Croissance

MFIs Micro Financial Institutions

MIS Management and Information System

OECD Organization for Economic Corporation and Development

ROA Return on Assets

ROE Return on Equity

SPSS Statistical Packages for Social Sciences

 ABSTRACT

This study examines empirically the impact of corporate governance on financial

performance in MFIs. Despite the substantial theoretical development in the field of
corporate governance over the past decades, the gap between theory and practical still needs
to be reconciled, many MFIs close down due to the problem of governance. It has been
noticed that a significant relationship exists between management control and economic
profitability and the composition of the Board of Directors, its structure and procedures on
financial profitability. Our work constitutes an attempt to find out the impact that corporate
governance has on the financial performance of microfinance institutions. The result of our
analyses shows that, the implementation of a sound management control positively and
significantly affects the economic profitability of MFIs, it has a high correlation coefficient.
It also shows that the financial profitability of microfinance institutions is positively affected
by the procedures and composition of the governing board of directors.

We strongly recommend that microfinance institutions should increase the number of

their board committees so that they can be able to effectively take part in control, education
of members and the sensitization of the general public. The board should also communicate
to members and shareholders how the resources of the institution have been used.

Key words: Corporate governance, microfinance, financial Performance, board composition.

 RESUME

Dans ce travail, nous examinons empiriquement l’impact de la gouvernance sur la

performance financière des établissements de microfinance dans la ville de Bamenda. Malgré
les nombreux développements théoriques dans le cadre de la gouvernance, il existe toujours
un fossé entre la théorie et la pratique qui a besoin d’être fermée, car plusieurs micro finances
ont fait faillite à cause de ce problème. Il a été établi qu’il existe un lien entre la gouvernance,
la rentabilité économique et la composition du conseil d’administration et leurs politiques
concernant la rentabilité financière. Notre travail se résume à comprendre l’impact qu’a la
gouvernance sur la performance financière dans les établissements de micro finance. Le
résultat de notre travail, nous démontre clairement que l’implémentation d’un système de
contrôle de gestion (contrôle managérial) affecte positivement et significativement la
rentabilité économique des établissements de micro finance, avec un coefficient de
corrélation élevé. Il montre également que la rentabilité des établissements de micro finance
est positivement influencée par la composition du conseil d’administration.

Nous recommandons fortement que les institutions de microfinance augmentent le

nombre de leurs comités de conseil afin qu'ils puissent participer efficacement au contrôle, à
l'éducation des membres et à la sensibilisation du grand public. Le conseil devrait également
communiquer aux membres et aux actionnaires comment les ressources de l'institution ont été
utilisées.

Mots clés: Gouvernance, Microfinance, performance financière, composition du conseil.

 GENERAL INTRODUCTION

During the economic crisis in the second halve of the 1980s many African countries were
affected; especially Cameroon where the financial sector was greatly damaged. The banking
sector became very suspicious after the crisis and could only give out loans with adequate
guarantee and for a very short period of time they could manage. This encouraged the
proliferation of many small saving and loans institutions. Microfinance is the provision of
financial services by registered entities which do not have the status of banks or financial
institution, to low-income clients or solidarity lending groups including consumers and the self-
employed, who traditionally lack access to banking and related services.1 MFIs are the main
facilitators of funding through the provision of micro credits, though private equity, mutual
funds, hedge funds and other organizations have become important as they invest in various
forms of debt. The field of microfinance deals with time, money, risk and how they are
interrelated.2

Micro financing can be traced back to an obscure experiment in Bangladesh about 40

years ago owing to the works of Muhammed Yunus in 1976 who is known as the founder of
Grameen Bank and Nobel Peace Prize Winner of 2006. According to the Consultative Group to
Assist the Poor (CGAP, 2006), microfinance is the provision of basic financial services to
impoverished clients who otherwise lack access to financial institutions. Microfinance
institutions help to reduce poverty by providing the poor with sustainable credit facility to start
small business. Three features distinguish microfinance from other formal financial products.
These are: the smallness of loans advances and or savings collected, the absence of asset based
collaterals, and simplicity of operations. In relation to the features of microfinance, the poor are
more likely to lose their money through fraud or mismanagement in informal savings
arrangements than are depositors in formal financial institutions.

The movement of Microfinance in Cameroon has its roots in the year 1960s through the
creation of the first cooperative in 1963 by a Dutch Catholic father Alfred Jensen in Njinikom;
North-West region of Cameroon. This Cooperative is the founding father of CAMCCUL
(Cameroon Cooperative Credit Union League). In Cameroon for example, Micro Financial
Institutions (MFIs) dominate the financial sector and news of MFIs closure or having
liquidity problems make prominent headlines in most newspapers and television channels.
Institutions that were created under the premise of poverty alleviation are becoming tools to
get the poor trapped in poverty. Microfinance has been exploited and will continue to be
exploited by major stakeholders in the microfinance value chain who preach the same doctrine-
that of poverty alleviation (Fotabong, 2011).

The financial performances of microfinance institutions (MFIs) have been largely

highlighted by the international community (Armendariz de Aghion, 1999). However, little
research has focused on the implications of management policies. The impact of some
governance issues on development performances has been assessed, but this has mostly been
done at the macro-level. Microfinance institutions (MFIs) play a vital role in the economic
development of many developing countries.

The recent waves of corporate scandals in developed countries indicate that there is much
room for improvement of governance practices even in countries with well-functioning
markets and in industries with established mechanisms of control. Investigating corporate
governance practices in microfinance institutions is important because of the significant
resources they leverage in regard to poverty alleviation. Rock and al., (1998), good corporate
governance has been identified as a key bottleneck to strengthen the financial performance of
MFIs and increase outreach of microfinance. Indeed, it is believed that the Asian Crisis and
seemingly poor performance of the corporate sector in Africa have made the concept of
corporate governance a catchphrase in the development debate (Berglof and Von Thadden,
1999). It is believed that practice of good governance by MFIs generates investor’s goodwill and
confidence.

The recent entrance of investors who provide capital for the advancement of trust worthy
microfinance institutions also raises important issues regarding the characteristics and quality of
governing bodies that lead these institutions. Good institutional governance seeks to ensure that
there are transparent and efficient mechanisms for monitoring and disclosing the efficiency and
effectiveness with which those entrusted to govern use these resources; and that they account for
stewardship (Mwaura and Gatamah, 2000)3. Therefore this necessitated the need to study:
Corporate governance and financial performance in microfinance institutions: the case of
North West Region, Cameroon.
 The financial performance of microfinance institutions is a necessary condition for
institutional sustainability (Hollis and Sweetman, 1998). African MFIs have structural
weaknesses at several levels: governance, portfolio management, internal control, human
resources and lack of financial sustainability. The microfinance sector of Cameroon still lacks
the capacity to match the huge needs of the poor; this is because of the challenges relating to
their growth. In recent times, microfinance has face a lot of challenges retarding their growth;
some of these challenges are that: the microfinance community has experienced some major
failures because of inadequacies in its operation including corporate governance (Labie, 2001),
given its tremendous outreach, its future growth and sustainability depends on how it is
governed and to attract further fresh capital in to this industry requires a thorough understanding
of corporate governance practices of MFIs.

Given the fact that there exist allot of asymmetry of information between the principal
and the agent, and that the interest of the principal (revenue) is different from that of the agent
(power, prestige, job security), there exist a conflict of interest between these two parties and
inured to solve this problem and bring the two together, management has to be accountable to the
board in every aspect of the company (corporate governance). According to Charreaux, (1997), it
is “all the organizational mechanisms which have the effect of limiting the powers and of
influencing the decisions of the management, in other words, which govern their conduct and
define their discretionary space”. Since microfinance gives out loans to the very poor and in most
cases do not collect collateral, the faces allot of difficulties cause customers to reimburse their
loans.

As to what concerns the collapsed or failure of MFIs, COFINEST which was one of the
biggest microfinance institution in Cameroon collapsed and her failure was accounted for by the
miss management of funds due to the lack of transparency in the management system of this
institution. Other microfinance institutions like FIFA, Dominion finance, Raven green finance
and Global finance (which went operational between 2008 and 2010) have also gone bankrupt
and this actually affected the growth of MFIs in Cameroon due to the lack of confidence by
customers and investors. This is just to emphasize that the implementation of a good corporate
governance system in microfinance institutions is of paramount important to its growth.

Many microfinance institutions in Cameroon do not clearly outline their governance

Nuamah, (2014) concluded that the collapse of MFIs was caused by the inability of MFIs to
sustain operations and fraudulent activities by staff. Another study by Kofi, (2012), established
that most microfinance institutions collapsed on the account of non-performing loans. Kofi went
further to state that the problem of non-performing loans was a challenge to the growth of
microfinance institutions.

Even though many studies have been conducted to identify the relationship between
corporate governance practices and firm performance, there are limited scholarly studies
conducted for the microfinance sector of Cameroon in relation to corporate governance. Kerubo,
(2011) carried out a study based on corporate governance practices in microfinance institutions
and did not focus on its impact on financial performance. The increasing emphasis in recent
years on financial sustainability rather than on social mission has led to allegations of mission
drift among Microfinance Institutions. It is in this context that the issue of corporate governance
of Microfinance institutions becomes increasingly relevant. Following the above information and
the limited study on what makes the relationship between corporate governance and the growth
of microfinance institutions, this study is based on answering the question; to what extent can
corporate governance influence the financial performance of microfinance institutions in
Cameroon? Specifically we have the following subsidiary questions:

 To what extent can management control influence the financial performance of

microfinance institutions?
 What is the incidence of board composition on the financial performance of MFIs?

From the above research questions, we are going to have the following objectives; our
general objective will be to verify if corporate governance influences the financial performance
of microfinance institutions. This will help us to derive subsidiary objectives to study as follows:

 To assess the extent to which management control can influence the financial
performance of microfinance institutions
 To verify if board composition has a significant incidence on the financial performance
of microfinance institutions

Brown D., (2004) carried out a study to measure corporate governance and firm
performance and he found that better-governed firms were relatively more profitable, more
recommended that firms needed to impose effective good governance to grow. Brown and
Caylor, (2004) observed that good governance has positive impact on a firm’s financial
performance. Gadi, (2015)4 in the study, the impact of corporate governance on the financial
performance of micro-finance banks in North Central Nigeria using the Pearson correlation
established a significant relationship between earnings per share (EPS) and corporate governance
practices. The regression analysis showed that no significant relationship existed between
corporate governance and bank’s financial performance. Based on the above empirical research
works we formulated our second subsidiary hypothesis as follows: These findings help to draw
the general hypothesis as follows: corporate governance positively and significantly influences
the financial performance of microfinance institutions. From the general hypothesis, the
following specific hypotheses were retained:

H1: Management Control significantly influence the financial performance in MFIs

H2: Board composition enhances positively the financial performance of MFIs.

This study will be of great importance to academics, microfinance institutions and policy
makers. To academics, the study will be very useful to researchers and practitioners in the sector
who may be interested to understand more about microfinance operations and how they are
governed. The study may also stimulate interest in the sector while at the same time providing
crucial background and seeks to add to the existing knowledge in the field and increase to the
literature review available for subsequent research in this area.

To managers of microfinance institutions, the study seek to give them an insight on the
governance challenges that come with the application of the corporate governance practices and
hence determine when and where they may need to make adjustments in order to ameliorate the
financial performance of their institutions. It will also help managers to know how important
financial stewardship is for the financial autonomy of microfinance institutions.
This research will be carried out with the help of primary data and secondary data. Primary
data will be collected in relation to corporate governance through the administration of
questionnaires and interviews while secondary data will be collected in view of the financial
performance of microfinance institutions through their annual financial reports and other reliable
sources. The study will be concentrated on category one and category two microfinance
institutions that have been in existence for at least five years (5years) and above. Stratified
random sampling technique will be used to choose 56 microfinance institutions situated in the
North West Region of Cameroon. The choice of the North West Region as the study area
(sample space) is due to the fact that many microfinance institutions are located this area owing
to the fact that the first microfinance institution was formed in this region. The chosen MFIs will
be administered questionnaires and interviews in order to collect data needed for the study. In
view of the method of data analysis, Descriptive statistics and Econometric methods will be
used. In relation to descriptive statistics, we will make use of pie charts, bar charts, bar charts
and tables. For econometric model we will use Multiple Linear Regression Model.

This study is going to be effectuated with the use of a classical plan. This plan entails that
the work should be done in two parts made up of four chapters. Our work is divided into two
main parts. Part one is aimed at bringing out the theoretical conception of corporate governance
and financial performance as well as their theoretical fundamental perspectives (agency theory,
stewardship theory, stakeholder theory, resource dependency theory and transaction cost theory).
Whereas, part two’s objective is to present the practice of corporate governance in MFIs in
Cameroon, the research methodology, analysis of collected data and interpretation of results. It
lastly presents managerial implications of our findings in which we try to give some proposals to
stakeholders in MFIs that can improve their level of corporate governance and reduced the rate
of insolvency in this sector of activity.
 PART ONE:
CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE:
AS MARRIED THEORETICAL CONCEPTS
 Corporate governance is not merely the governing of a certain form of organization, in
this case ‘a corporation’, but has a broader meaning. The concept has been used by
different people differently and still there is no universally accepted definition of
corporate governance (Rezaee, 2009)5. The importance of corporate governance came
to attention of governments in the 1990s after western economies witnessed a series of
financial scandals such as Enron, WorldCom, Paramalat which were facilitated by
wrongdoings on the part of the management, auditors and financial market operatives.
Microfinance is the term that has come to refer to such financial arrangements offering financial
services to the modest population. Three features distinguish microfinance from other formal
financial products: the smallness of loans offered or savings collected the absence of asset-based
collateral and the simplicity of operations.

As a starting point, most of the work in the field of corporate governance takes the issue
highlighted first by Berle and Means (1932)6, which is the separation of ownership and control.
This separation will generate an agency relationship between owners as “the
principal” and managers as “the agent”. In an ideal world, managers would invest all of
their abilities and skills to generate the best possible returns for investors. In the real
world, things are slightly different. In this first part of our work, we are going to bring out
conceptualize corporate governance and the notion of microfinance in the first chapter while in
the second chapter we will explain the theoretical relationship between governance and financial
performance in MFIs.
 CHAPTER ONE:
CORPORATE GOVERNANCE: THE PIN CODE OF MICRO FINANCIAL
INSTITUTIONS IN CAMEROON

Microfinance industry is the primary source of credit and saving to low income earners.
The industry is currently growing rapidly and how they are governed therefore matters
(Kyereboah C. and Biekpe N., 2006). Stakeholders in the industry have recognized that good
governance is an important element in the success of the MFIs. In spite of this observation, only
a few studies have focused on this domain. Microfinance practitioners have recognized that good
governance is critical for the sustainability of the MFIs but only few studies on regulations in
microfinance have touched upon governance issues. This chapter will explain the concept of
corporate governance in the first section and in the second section; the Cameroon microfinance
landscape shall be presented.

SECTION I: THE NOTION OF CORPORATE GOVERNANCE

Although, corporate governance question is abundantly discussed in the business and

political spheres, the scientific thinking in this field remains poor and partial Gerard
CHARREAUX, (1991). This section will adopt the approach by Shleifer and Vishny, (1997),
and will review a selection of the literature produced since 1997. The aim of this section is to
discuss the following questions: What is corporate governance and how pertinent is this concept?
Why and when does it become a problem? What are the golden principles of CG?

I.1 SPECIFICATIONS OF CORPORATE GOVERNANCE

Nowadays, the term corporate governance is used quite ‘liberally’ and it is known to
mean different things to different authors. Nonetheless, the following specifications
should give the reader a general idea about the concept:

I.1.1 DEFINITION OF CORPORATE GOVERNANCE

There is no universally accepted definition of corporate governance since it can be seen

I.1.1.1 NARROW DEFINITIONS OF CORPORATE GOVERNANCE

According to La Porta et al., (1999), corporate governance refers to “a set of mechanisms

through which outside investors protect themselves against expropriation by the Insiders”.
Shleifer and Vishny, (1997) define that “corporate governance deals with the ways in which
suppliers of finance to corporations assure themselves of getting a return on their investment”.
The authors ask the questions: Why do investors decide to part with their money and entrust
managers with it, when there are still no proven mechanisms which would guarantee them a
return on their investments? Why managers do not run away with the money? Although there are
sporadic cases, mostly they do not. Another definition of corporate governance by Parkinson,
(1994) is that “corporate governance is the process of supervision and control intended to ensure
that company’s management acts in accordance with the interests of shareholders”.

I.1.1.2 BROAD DEFINITIONS OF CORPORATE GOVERNANCE

Defined broadly according to (Oman, 2001), “corporate governance refers to the private
and public institutions, including laws, regulations and accepted business practices, which
together govern the relationship, in a market economy, between corporate managers and
entrepreneurs (corporate insiders) on one hand, and those who invest resources in corporations,
on the other”. Siebens, (2002) defines “corporate governance as both the knowledge and the art
of weighting divided interests of all the stakeholders. In other words, it is the effort of balancing
the relationships of power. The importance of corporate governance has been realized all over
the world with the integration and liberalization of financial markets”.
Solomon, (2004) defines that “the term should be distinguished from management.
Management is related to the daily operations of business like production, while on the other
hand, corporate governance refers to rules, regulations and best practices for securing
shareholder claims, enhancing competitive power and reaching capital within the global
environment”. To Cadbury, (1999), “Corporate governance is concerned with holding balances
between economic and social goals between individual and communal goals…the aim is to align
as nearly as possible the interests of individuals, corporations and society”.
Another view by Tricker, (1984) “the governance role is not concerned with the running
of the business of the company per se, but with giving overall direction to the enterprise, with
overseeing and controlling the executive actions of management and with satisfying legitimate
 This study adopts the definitions that reflect the agency theory or shareholders model,
particularly the Cadbury definition of corporate governance as: “a system by which
companies are directed and controlled”, which highlights the main players’ roles in an
organization, including shareholders, the board of directors as well as the auditor
(Cadbury, 1999).

I.1.2 HISTORICAL OVERVIEW OF CORPORATE GOVERNANCE

The foundational argument of corporate governance, as seen by both academics as well

as other independent researchers, can be traced back to the pioneering work of Berle and Means,
(1932). They observed that the modern corporations having acquired a very large size could
create the possibility of separation of control over a firm from its direct ownership. Berle and
Means’ observation of the departure of the owners from the actual control of the corporations led
to a renewed emphasis on the behavioral dimension of the theory of the firm. Governance is a
word with a pedigree that dates back to Chaucer. In his days, it carries with it the connotation
“wise and responsible”, which is appropriate. It means either the action or the method of
governing and it is in the latter sense that it is used with reference to companies. Its Latin root,
“gubernar” means to steer and a quotation which is worth keeping in mind in this
context is: “He that governs sits quietly at the stern and scarce is seen to stir” (Cadbury, 1999).
Though corporate governance is viewed as a recent issue but nothing is new about the concept
because, it has been in existence as long as the corporation itself (Imam, 2006).
Over centuries, corporate governance systems have evolved, often in response to
corporate failures or systemic crises. The first well-documented failure of governance was the
South Sea Bubble in the 1700s, which revolutionized business laws and practices in England.
Similarly, much of the security laws in the United States were put in place following the stock
market crash of 1929. There has been no shortage of other crises, such as the secondary banking
crisis of the 1970s in the United Kingdom, the U.S. savings and loan debacle of the 1980s, East-
Asian economic and financial crisis in the second half of 1990s (Flannery, 1996)8. In addition to
these crises, the history of corporate governance has also been punctuated by a series of well-
known company failures: the Maxwell Group raid on the pension fund of the Mirror Group of
newspapers, the collapse of the Bank of Credit and Commerce International, Baring Bank and in
recent times global corporations like Enron, WorldCom, Parmalat, Global Crossing and the
international accountants, Andersen (La Porta, Lopez and Shleifer, 1999). These were blamed on
or major corporate failure, which was a result of incompetence, fraud, and abuse, was met by
new elements of an improved system of corporate governance (Iskander and Chamlou, 2000).

I.1.3 THE CORPORATE GOVERNANCE PROBLEM

Becht et al., (2002)9 argue that the corporate governance problem arises whenever an
outside investor wishes to exercise control differently from the manager in charge of the
firm. La Porta et al., (1999) identified the risk of outside investors being expropriated by
insiders as a corporate governance problem. Berglof and Von Thadden, (1999) pointed out that
the “recent literature is based on the premise that the main corporate governance problem is (the
conflict between) self-interested management and weak, dispersed shareholders”. Similarly, and
in the spirit of Enriques and Volpin, (2007) maintain that “the fundamental problem of corporate
governance in the United States is to alleviate the conflict of interest between dispersed small
shareowners and powerful controlling managers”. Hart, (1995) on the other hand, argues that
whenever two conditions are present, corporate governance issues arise. “First there is an agency
problem” and “second, transaction costs are such that this agency problem cannot be dealt with
through a contract”.

The situations described above do not account for all possible manifestations of
corporate governance problems; nevertheless, they give the reader an idea of the
nature and breadth of the field this study is about to tackle. What is more or less
obvious at first glance is the broad division between outsiders and insiders, something
that brings the discussion back to Berle and Means, (1932) and their distinction between
ownership and control. However, there are other theories which can serve as grounds
for nurturing different views for these problems.

I.2 RULES AND IMPORTANCE OF CORPORATE GOVERNANCE

In this sub-section, the golden principles as prescribed in the UCCC 2011 and the
theoretical implications of corporate governance shall be presented.

I.2.1 PRINCIPLES OF CORPORATE GOVERNANCE

The Universal Corporate Governance Code for MFIs, (2011) has identified seven
corporate governance principles which are going to be presented using the table below:
 Table 1: The principles of corporate governance
Principles Explanation

Fairness relates to protection of shareholder rights, in the case of organizations with a

corporate status, guaranteeing fair treatment for everyone and with special protection of
minority shareholder rights and encouraging the exercise of their right to company
Fairness information and voting rights. In the case of organizations with a different legal status, like
NGOs, cooperatives, etc. the guarantee that decision making at the governance levels is fair,
limiting abuse of power by a minority group.

This is about establishing a framework of responsibility for administrators (or governance

body members) and senior executives (or the organization's managers) aimed at creating long-
Responsibility term, sustainable value for shareholders and other stakeholders. The aim is the company's
long-term survival on the basis of sustainability, keeping integrity and boosting its financial
and intellectual capital (human, structural, relational and social integrity.

Accountability entails of the financial reporting of the present situation of the institutions to
shareholders and investors by managers. Providing reliable and periodical performance results
to investors are necessary but insufficient as far as accountability is assessed. If accountability
Accountability is defined on how performance is measured against key governance policies and transparency
rules, then risk/return attribution becomes essential to evaluate the abilities of asset managers,
identify where and how money is earned and generate a dialogue between asset managers and
investment clients.

This refers to the respect for people’s dignity and their inherent rights. An organization must
be committed to the United Nations Declaration of Human rights and other international
Respect of
organization treaties that promote human rights, in particular the International Labor
rights Organization. An important aspect of these rights and a demonstration of this dignity is equal
opportunities and respect for diversity.

Corporate integrity is all about promoting honorable and impeccable behavior, based on the
belief that without integrity customer, stakeholder and company trust is impossible. As part of
Corporate personal integrity, the organization’s employees must show outstanding dedication and a
integrity professional attitude in both processes and result management, in order to ensure an excellent
reputation. The organization has to also make sure that the external partners of the institution
get the perfect information about the management of the organization.

This requires attaching particular importance to policies that allow stakeholders their access to
significant information, guaranteeing that this information is reliable and available, based on
transparency and external, independent verification. This means issuing and disclosing
Transparency information responsibly and accurately, promoting transparency, fluidity, confidentiality and
integrity in the markets where it operates. The organization must also establish procedures and
rules to ensure that legal requirements regarding the safekeeping of documents and records are
fulfilled.

This principle requires organizations to comply with legal provisions and regulations that
Compliance apply to the organization in accordance with the applicable legal framework, cooperation with
with supervisory, judicial and administrative authorities to prevent unlawful activities and conflicts
regulations of interest. Any organization that is not able to work in line with general and particular
regulations binding its existence cannot implement a good system of corporate governance.

Loyalty Loyalty refers to acting in good faith in the organization's general interests, honestly and
 I.2.2 IMPORTANCE OF CORPORATE GOVERNANCE
The importance of corporate governance relies on its contribution to economic growth.
Effective corporate governance promotes the efficient use of resources both within the firm and
country (Gregory and Simms, 1999)10. Improvement in corporate governance practices can
improve the decision making process within and between a company’s governing bodies, and
should thus enhance the efficiency of the financial and business operations. Better corporate
governance also leads to an improvement in the accountability system, minimizing the risk of
fraud or self-dealing by company officers. An effective system of governance should help ensure
compliance with applicable laws and regulations, and further, allow companies to avoid costly
litigation. Hence, the pertinence of CG can be summarized in the table below:
Table 2: The importance of corporate governance
Importance Explanation

The first is the increased access to external financing by firms. “Better creditor rights and
Increased
shareholder rights have been shown to be associated with deeper and more developed
access to banking and capital markets” (Claessens, 2003). This in turn can lead to larger investment,
financing higher growth, and greater employment creation.

The second channel is a lowering of the cost of capital and associated higher firm valuation.
Higher firm The firm value is affected positively from the quality of the corporate governance framework
valuation through lowering the cost of capital. “This makes more investments attractive to investors,
also leading to growth and more employment” (Claessens, 2003).

The third channel is better operational performance through better allocation of resources and
better management. (Claessens, 2003) Corporate governance adds more value through
Better
efficient management. It provides better labor policies, asset allocation and other sufficiency
operational improvements. This creates wealth more generally. Studies in the past such as Black, Jang
performance and Kim, (2003) and elsewhere show that better governed companies have higher sales
profits and sales growth.

“Good corporate governance can be associated with a reduced risk of financial crises. The
Reduced risk quality of corporate governance can also affect firms’ behavior in times of economic shocks
of financial and actually contribute to the occurrence of financial distress, with economy wide impacts.
crises This is particularly important, as financial crises can have large economic and social costs.”
(Claessens, 2003)

Better relations One of the main principle corporate governance, firm’s management should be really in a
with other good relationship with all stakeholders. All kind of corporations must deal with all their
stakeholders participants such as stakeholders, stakeholder representatives, and financiers other than
stakeholders, government, regulators and policymakers. “Each of these monitor, discipline,
motivate, and affect the management and the firm in various ways. This helps improve social
and labor relationships and aspects such as environmental protection.” (Claessens, 2003)
 The above table was summarized by Gregory, (2000). He outlined the importance of
corporate governance as follows: Promotes the efficient use of resources both within the
company and the larger economy, Helps ensure that the company is in compliance with the laws,
regulations, and expectations of society, Provides managers with oversight of their use of
corporate assets, Supports efforts to reduce corruption in business dealings, and assists
companies in attracting lower-cost investment capital.

I.3 CLASSIFICATIONS OF CORPORATE GOVERNANCE

Researchers have identified, very broadly, two systems of corporate governance: the
Anglo-American system also known as the market-based system (Becht et al., 2005) and the
German-Japanese, better referred to as the network-based model (CHARREAUX, 1998). This
rubric will adopt this over-simplified broad division of corporate governance systems and
highlight the main features of each.

I.3.1 ANGLO-AMERICAN MODEL OF CORPORATE GOVERNANCE

Countries that adopt this corporate governance system, led by the United Kingdom and
the United States, generally have well developed and deep capital markets, widely
diffused ownership structure and well established rules and regulations governing the capital
market, and rely on markets to guide their companies. Although the two
countries are put together in one category, there is a significant difference between the
United Kingdom and the United States corporate governance practices. While in the United
Kingdom the position of the Chief Executive Officer is not held by the Chairman
of the Board, in the United States, despite significant reservations of the practitioners
and academics, it is the norm to do so (Shleifer and Vishny, 1997; La Porta et al., 1999).
On the positive side, the Anglo-American model of corporate governance highlights the
shareholder interests. The non-executive, or independent, directors of a single-tiered
Board of directors are elected by shareholders. In most cases they hold key positions
such as compensation and audit committees, and outnumber the executive directors.
The markets are generally able to reward or punish the good or bad performance of the
companies (Shleifer and Vishny, 1997).
On the negative side, this system gives more discretion to managers due to shareholders
that countries that provide better legal protection usually have dispersed and small
shareowners who are not so active in exercising some of their rights such as monitoring.

I.3.2 GERMAN-JAPANESE MODEL OF CORPORATE GOVERNANCE

The key feature of this model is the existence of large investors such as banks and other
financial institutions. Because they are able to invest large funds, they are interested in
getting more involved in the corporate governance of the company they are funding.
This, on its own, addresses the free rider problem of the Anglo-American model. Also
large investors are able to commit to and facilitate long term investments while
monitoring the managers, which address another main problem of the Anglo-American model.
Proponents of this model argue that the close relationship maintained with banks and
other long-term debt and equity holders gives companies access to capital at lower cost
than their counterparts in the United States and United Kingdom. This means that
projects which would be refused by American or English financiers on the ground of
profitability would be embraced by the German or Japanese financiers (Keasey K., et al.,
1998). Most researchers agree that the Japanese culture and mentality has strongly influenced
their corporate governance system. “One aspect of Japanese corporate governance that
has been praised in the 1980s, is the long run nature of relationships between the
multiple constituencies in the corporation, which made greater involvement by
employees and suppliers possible” (Becht et al., 2005)11.
The main problem with this model, though, is the position of small shareholders.
Because the practice in these countries is based on the presence of large shareholders, there is a
chance that small shareholders and/or small investors are in a disadvantageous situation and run
the risk of being expropriated by large shareholders. La Porta et al., (2000) argue that the lack of
legal protection for small shareholders induced these countries to end up with large investors as a
solution to the agency problem.

This section has given us a global view of what corporate governance is all about.
Therefore, it can be said that, governance is a means by which an organization's resources are
directed, monitored, and measured. It plays an important role in preventing and detecting fraud
and protecting the organization's resources, both physical and intangible.
SECTION II: THE BIRD EYE VIEW OF MICRO FINANCIAL
INSTITUTIONS IN CAMEROON

Cameroon as well as other third world counties has observed an exponential expansion of
MFIs as a means of reaching the poor and alleviating poverty, this can be best confirm by the
fact that MFIs can be found almost in every village in Cameroon. Microfinance is the provision
of financial services to low-income clients.12 In this section, we are going to present the portfolio
of microfinance activities and the institutionalization of corporate governance in MFIs on one
hand while on the other hand, its mission, growth/evolution as well as best practices shall be
emphasized within the Cameroonian context of microfinance.

II.1 PRESENTATION OF MICROFINANCE IN CAMEROON

This rubric will briefly define the notion of microfinance and summarily present it origin
in the world before laying detail emphasis on the Cameroonian context.

II.1.1 DEFINITION OF MICROFINANCE INSTITUTIONS

According to Lukwago Joel, (2012), the concept of micro-credit and the extension of
small loans without any collateral, based on joint liability was pioneered by Dr. Muhammad
Yunus in 1976 in Bangladesh. The remarkable outreach of this movement in Bangladesh (which
presently covers not only credit but also a number of financial and non-financial services) has
shown that extending credit and financial services to the poor is feasible and profitable.
The access of the poor to credit is also recognized as an important strategy in achieving
the Millennium Development Goals of promoting gender equality, women's empowerment and
poverty reduction. The World Development Report of 2000/2001 widely recommended the
microcredit for poverty reduction and as a social safety net for the poor of the developing
countries. Microfinance is high on the public agenda after the United Nation Year of Microcredit
in 2005 and the awarding of the Nobel peace prize to Dr. Yunus and the Grameen Bank in 2006.
Microfinance is defined as the provision of financial services, mostly savings and credit
to the poor and low income households that otherwise don’t have access to mainstream
commercial banks (Rock et al., 1998). Ledgerwood, (1999) defines microfinance as the provision
of financial services to low income clients. According to Robinson, (2001) Microfinance is
financial services primarily credit and savings provided to people who farm, fish or herd at a
small scale and those who operate small enterprises.

II.1.2 ORIGIN AND EVOLUTION OF MFIs IN CAMEROON

The roots of formal MFIs in Cameroon can be traced far back as 1963 when the first credit
union was set up at Njinikom in the North West region of Cameroon. Thanks to the work of a
catholic reverend father who encouraged Christians to form groups as a way to help each other
improve their economic situation. Today, with the current philosophy of little by little your savings
grow, like the biblical mustard seed, it has grown to become the biggest network and player in the
microfinance market of Cameroon under the umbrella institution Cameroon Cooperative Credit
Union League (CAMCCUL). Apart from the CAMCCUL network, MFIs establishment in
Cameroon setting aside CAMCCUL was discouraging until 1980s when the banking crisis led to
the collapsed of series of commercial and developmental banks and subsequent closure of
commercial banks branch network in most rural and semi urban areas. These expanded existing
gap for the supply of financial and micro financial services in rural areas.

In the late 1980s, Cameroon’s financial sector experienced a severe crisis. The banking
sector was diluted by the difficult economic environment, weak judicial system, poor
management, excessive risk focus, weak supervisory framework, and government interference in
banks’ lending policies. These factors led to liquidity and solvency problems in the sector. The
reform package put in place in 1989 gave priority to the banking sector. During the initial phase
(1989-1992), reform measures included liquidation, restructuring and privatization. Government
participation was financed through an advance from the regional central bank (BEAC) and a
bilateral structural adjustment loan. At the end of this phase, a number of banks remained
undercapitalized and the quality of banks portfolio had not improved. As result, by the end of
1995, the five largest banks which accounted for almost three quarters of the banking sectors
assets were technically insolvent and about half of the loans to the private sector were not
performing. Due to the crisis that led to the slowdown of the banking system in Cameroon,
microfinance institutions became popular with the objective of poverty alleviation. According to
Wanda, (2007), the rigorous crises during the late 80s and the early 90s and the tightening up of
conditions of access to credits by restructured banks are the main factors that led to the explosion
of microfinance in Cameroon.
In 2000, the banking Commission estimated the number of microfinance institutions
II.2 MISSIONS AND CATEGORIES OF MFIs IN CAMEROON
A mission is the task to be achieved, entrusted or received. This sub-section shall present
the missions and the categorization of MFIs according to COBAC.

II.2.1 MISSIONS OF MFIs IN CAMEROON

MFIs are known worldwide to provide financial services to the poor aimed at alleviating
poverty in these communities and improving the standards of living for people who benefit from
these services, thereby encouraging the development of SMEs which are of great importance
towards economic growth Taylor and Francis, (2014).13 Thus, as regards to microfinance, the
mission first is to provide to the poor range of population which is excluded from the banking
structure, from the financial services being able to enable them to improve their living
conditions. This is possible through activities such as credit granting, savings accounts, money
transfer. For these years, the experiment shows that the MFIs assist the poor with; the increase of
their income; the creation of companies and the fight against poverty. Then, in spite of the
poverty persistence in African continent, the MFI contribute as well to the exchange of the level
of the standard of living as to the social and financial reinforcement performance of the poor
which remained up to now his principal target.

Before 1998, microfinance institutions in Cameroon were supervised and placed under
the control of the Ministry of Agriculture. During the period the activities of these institutions
were seen as essentially suited for the promotion of rural and agricultural activities. However, as
a result of many irregularities in the field and due to little or no supervision and control expertise
at the level of personnel working in the Ministry of Agriculture there was an urgent need to
protect the public and guard depositors’ funds. This resulted into a Prime Ministerial decree that
puts the granting of licenses, supervision, and control of all MFIs under the Ministry of Finance
and COBAC.

II.2.2 CATEGORIZATION OF MFIs IN CAMEROON

The conditions to carry out micro financial activities are defined at the sub regional level
by the Central African Monetary and Economic Commission (CEMAC) and it state that, there are
three categories of microfinance as described in the table below. (CEMAC/COBAC, 1992).
 Table 3: Conditions for Categorization of MFIs in Cameroon
JUDICIAL MINIMUM
CATEGORY DEFINITIONS TYPE OF ACTIVITY
FORM CAPITAL
These are MFIs which
collects their members Cooperatives Saving collection and
Category
savings and use the savings and the granting of loans to
One Not fixed
to grant loans exclusively to Association members
her members
Saving collection and
These are MFIs which carry Public
Category 50 millions the granting of loans to
out saving collection and limited
Two FCFA members and third
grant loans to third parties companies
parties
These are MFIs which grant
Category loans to third parties without Project 25 millions Grant loans to third
Three carrying out saving banks FCFA parties
collection.

Source: Adapted from COBAC, 1992

The master text prepared by COBAC for the regulation and control of MFIs focuses on
the nature of activities of these institutions and not their legal form. In article one of the text,
microfinance is referred to as activities undertaken by authorized entities without the status of
either a bank nor a financial institution, but do accept savings and offer credits in addition to
other financial products to mostly those left out of the traditional banking system. The same text
categorized these institutions under three categories. Besides their different categories, MFIs are
equally distinguished by their organizational mode and their activities or services offered. These
establishments can either carry out their activities independently or as a network.

II.3 CAMEROON REGULATORY FRAMEWORK FOR MFIS SERVICES

In a state of law, business transactions must be supervised and the products of each
organizational entity have to be described and regulated. This heading seeks to present the
services offered and the supervisory set up of MFIs in Cameroon.
II.3.1 SERVICES OFFERED BY MICROFINANCE INSTITUTIONS

A MFI functions primarily as a financial intermediary. The services offer by

microfinance institutions are also offered by classical banks. They have a difference at the level
of customers because microfinance institutions offer their services to low income customers who
have been excluded or rejected by formal banks. The most common services offer by
microfinance establishments are described in the table below:

Table 4: Services offered by MFIs in Cameroon

SERVICES SERVICE DESCRIPTION
Credit can be defined as a loan that is given by the lender to the borrower
against a counterpart known as interest. Many low income households
borrow from MFI with the objective to use the money for household
consumption, educational purposes, to set up a small business and to pay
another debt owe to a third party. Loans are usually provided for
MICROCREDIT investment in a productive pursuit (as opposed to being used for
consumption). There are times (e.g. during a drought that causes a lack of
production), where the loans may be provided for consumption as well,
although if used too widely, it may result in a high rate of default. Credit is
usually provided on a short-term basis (anywhere between 3 months and
one year), generally for small loan sizes.
Deposit taking services can be very valuable to the poor, who often have
very few reliable places to save money in order to smooth timing
differences between their income and expenditure. From the MFI’s point of
view, it can be a useful source of funds, and can encourage financial
prudence in their clients. The risk in providing these services are similar to
MICRO
those faced by any bank. If the MFI’s loan repayment rate in particular is
SAVINGS
poor, there is a great risk that depositor’s capital will be eroded. Generally,
deposit taking institutions would be required to face much more regulation
than those providing just loan services. It can be disastrous for confidence
in the financial system if the poor lose their savings due to insolvency of
the MFI.
Money transfer has become one of the most important services in
microfinance institutions. Today, transferring money from one part of the
world to another takes little time to be executed. It is a very profitable
activity of the MFI. Money transfers were an activity mostly performed by
a number of commercial banks through international money transfer
MONEY systems like Western Union, Money Gram and others. A service of
TRANSFER transferring money is used mainly by those abroad who transfer money to
their family and friends. According to the World Bank, the annual global
market for remittances money transferred from migrant workers is around
167 billion US dollars. The estimated total is closer to 230 billion dollars if
one counts unregulated transactions. Remittances are also an important
source of income for many developing countries including India, China,
II.3.2 CAMEROON REGULATORY FRAMEWORK FOR MFIs

Providing access to finance to the poor has been considered as one of the tools for
poverty reduction and economic development (Morduch J., 1999). Asymmetric information and
transaction costs (markets imperfections) and lack of collateral explain, at least partially why the
poor lack access to financial services. However, innovative lending technologies such as join-
liability lending, prior savings lending and co-making lending may serve as the solutions to
asymmetric information problems and lack of collateral. Irrespective of the approaches to
microfinance, millions of poor people are in need of financial services and this calls for
regulation in order to protect both the depositors and the lenders, and in a long run, to prevent the
systemic risk.
Before 1998, MFIs activities in Cameroon were placed under the tutorship of the
Ministries of Agriculture and the Ministries of Finance because microfinance was initially seen
as essentially suited for the promotion of rural and agricultural activities. As a result of many
irregularities in the field and due to little or no supervision and control expertise at the level of
personnel working in the Ministry of Agriculture, there was an urgent need to protect the public
and guard depositors’ funds. This led to a Prime Ministerial decree that puts the granting of
licenses, supervision, and control of all MFIs under the Ministry of Finance and the Central
Africa Banking Commission (COBAC).
In Cameroon, MFIs are regulated by three different laws: (1) the national law, (2) the
COBAC law, (3) the Pan African Organization for Harmonization of Business Law in Africa
(OHADA). Each institution is compelled to comply with these frameworks paying attention to
the basic prudential norms as stated by COBAC (As part of the 2002 regulation, COBAC also
established 21 regulations defining prudential ratios, and existing MFIs were compelled to
comply with these ratios by the end of April 2007). However, despite the existence and clear
definitions of these laws and regulations, dissemination among major stakeholders remains
relatively poor.
The regulatory framework of microfinance activities in the CEMAC region used till date
was implemented in 2002 and is known as “Standard N° 01/02/CEMAC/IMAC/COBAC
Organization and supervision of microfinance activities in the CEMAC”. It focuses on the nature
of the activities and defines microfinance in its article one as “activities undertaken by authorized
entities that are neither banks nor financial institutions but take savings or deposits, give out
II.4 SPECIFICITY OF GOVERNANCE AND BEST PRACTICES IN MFIs

Corporate governance being broad concept must be customized to the activities of the
business entity. This heading is aimed at adapting CG to the MFIs while presenting best
theoretical practices.

II.4.1 SPECIFICITY OF GOVERNANCE IN MICROFINANCE

Since the microfinance sector came into creation, it has had a twofold mission. First,
MFIs seek to improve the lives of low-income people by providing financial services and
second, they are responsible for managing their resources in the best way possible to ensure
financial sustainability. This dual nature of social and financial goals is ever present in an MFI's
daily operations and is evident in its vision, mission and goals. The members of any MFI's
governing bodies must have the right experience and knowledge to guide the institution towards
achieving this twofold mission. Whether they began as NGOs or regulated financial institutions,
many MFIs are in transition from social entrepreneur/founder-dominated institutions in to more
professional institutions with a wider array of checks, balances and delegation of authority.
As the organization matures and shareholders place directors on the board and a few
independent board members are added, the board should gain more balance between
management and board. Sometimes management is perceived as weak, and the board, led by a
strong chair, dominates governance, particularly in cases where founders are in the chair
position. These boards may in fact try to manage and not govern. Achieving balance between the
board’s role in governance and management’s role in managing is a fine line that may take time
and significant effort. Organizations need to make their own assessments on how best to change
their governance culture; add board members for skills, independence, or both; and define clearly
the role of the board chair vis-à-vis the managing director or CEO. Maintaining the delicate
equilibrium between management versus board capture is at the heart of good governance.
One of the most important challenges that any MFI must face when designing its
corporate governance policy is how to strike this balance between social and financial goals. Just
as it is important to measure financial performance indicators, the same amount of effort must be
put into measuring the fulfillment of social goals. Until recently, the measurement of social
impact had not carried much importance. These days, more initiatives are being developed to
evaluate the success of institutions in turning their social mission into evident and measurable
 In the case of MFIs, corporate governance is closely related to how the governing body
(Board of Directors) and the management body (Management) manage the institution, in
particular how: The strategy and goals are set, Risk tolerance is determined, Everyday activities
are managed, Investors' interests are protected, Obligations with shareholders or contributors are
fulfilled, Stakeholders' interests are defended, Compliance with corporate goals is guaranteed
Conduct and activities are aligned so that the institution operates with solvency and integrity, in
fulfillment of laws and regulations in force.

II.4.2 BEST PRACTICES IN MICROFINANCE INSTITUTION MANAGEMENT

In this segment, we discuss the notion of best practice for microfinance institutions. When
we use the term best practice, we use it in a general framework, realizing, as Dunford, (2000)
argues, that best practices vary and change constantly as the microfinance fields matures. Due to
the nature of MFI clientele and the disparate environments in which MFIs operate, best practices
must be adaptable to the specific area in which the institution operates. Bhatt and Tang, (2001)
discuss MFI vehicles, technologies, and performance assessments and conclude that the future
success of microfinance will depend on MFI design tailored to specific clients. Bhatt and Tang's
assertion highlights the importance of research to develop sound practices of MFI design and
management.

The primary topics covered within the extant MFI best practice literature include the
determination of an optimal interest-rate to charge borrowers, whether to lend to groups or to
individuals, commercialization of MFIs, aspects of loan size and growth, credit scoring, and
lending relationships with customers. Whereas the setting of interest rates in a for-profit financial
institution is determined by the rate that will maximize shareholder wealth, MFIs face unique
issues in setting an appropriate rate. If MFIs charge rates too high, they may hinder their ability
to help the poor pull themselves out of poverty as well as price very poor persons out of the
market for loans. Excessive interest rates may also lead to MFI losses as borrowers cannot pay,
default on loans, and, in the case of group lending, bog down their solidarity groups. On the
other hand, due to the small principal amounts inherent with microcredit, little economies of
scale exist in the lending process to cover fixed costs. MFIs, moreover, operate with very high
administrative costs per dollar lent relative to formal financial institutions. Thus, to achieve
financial self-sufficiency, MFIs have to charge relatively high interest rates.
 Conning, (1999)14 constructs a theoretical model of the contract design problem facing
MFIs that want to maximize impact, target the poor, and achieve financial self-sufficiency. Using
data from 72 MFIs, Conning finds that sustainable MFIs that target poorer borrowers must
charge higher interest rates, have higher staff costs, and are less leveraged than those targeting
less poor borrowers. In contrast, Hollis and Sweetman, (1998) analyze mid 19th century Irish
loan funds and find that MFIs were able to lend to the poor at competitive interest rates without
subsidies. These Irish MFIs combated informational and enforcement problems while operating
at a surplus in a market that formal sector banks would not serve. Indirect evidence that the poor
may not mind paying high interest rates can be drawn from Perry, (2002) where MFI clients
borrow funds to become moneylenders, presumably successfully lending at rates higher than
their MFI charges. The poor who cannot obtain MFI membership are thus willing to pay rates
higher than that charged by the MFI. Robinson, (1996) also argues that interest rates charged to
microfinance borrowers should cover all costs and that the working poor can afford these rates
which are relatively low compared to their alternatives. Finally, Fafchamps, (1997) uses
simulation methodology to show that interest rate subsidizations have little impact on whether
poor in India invest in non-divisible and irreversible profitable projects.
Another main issue explored in detail in the existing MFI best practice literature is the
choice between offering group loans or individual loans. MFIs often rely on social collateral
within loan groups to secure their loans (Woolcock, (2001)). Gomez and Santor, (2001) provide
empirical evidence of the importance of social collateral. In an empirical study of 612 group
borrowers and 52 individual borrowers in Canada, they report that group lending and the
presence of neighbors have a positive correlation with self-employment earnings. It follows that
borrowers with higher earnings will have an easier time of servicing their microloans.
Churchill, (2000), addresses attempts to incorporate existing banking practices into MFIs.
Churchill discusses the impact of customer loyalty, similar to the relationship lending literature
in mainline finance and concludes that customer loyalty is key to MFI success. Schreiner
discusses the role of credit scoring in MFIs and argues that scoring can add value to the MFI
process. Norell discusses techniques that MFIs can use to reduce arrears, which include
following-up quickly on loans in arrears, forming strong solidarity groups, updating and
enforcing credit policies, and concentrating on the scope of lending. Finally, Woller, (2002)
reviews the costs and benefits of MFI commercialization and its impact on mission drift. He
concludes that the benefits of commercialization outweigh the costs, but recommends that MFIs
 CHAPTER TWO:
THE RELATIONSHIP BETWEEN CORPORATE GOVERNANCE
AND FINANCIAL PERFORMANCE

Corporate failures prompted interest in the link between corporate governance and firm
performance. The relation between corporate governance and firm performance has been the
subject for many extensive studies in the last decade. However, the biggest problem to microfinance
practitioners has been balancing the dual mission of outreach and sustainability. The changing of
microfinance environment has shown a move towards sustainability ultimately leading to governance
issues as donor funds shrink and equity inflows increase in the microfinance sector. Microfinance
institutions have therefore embraced boards and adopted principles of corporate governance to ensure
their survival. This chapter is aimed at bringing out the theoretical foundations and the mechanisms of
corporate governance on one hand and on the other hand this chapter will focused on the theoretical link
between corporate governance and financial performance in microfinance institutions.

SECTION I: CORPORATE GOVERNANCE: AN ABERRATION

Corporate governance becomes a multifaceted issue owing to the development of

complex corporate organizations and globalization of business operations. Thus, an analysis of
corporate governance requires strong theoretical foundations to capture the efficiency of existing
corporate governance mechanisms in different contextual conditions. Thus, this section provides
an analysis of different fundamental theories on corporate governance and its basic mechanisms.

I.1 ESTABLISHED PERSPECTIVES OF CORPORATE GOVERNANCE

As to what concerns corporate governance, many theories have tried to explain this
theoretical construct. This first segment shall dwell on the following theories which are viewed
as the foundation to the concept of governance:

I.1.1 AGENCY THEORY

functioning of the agency theory. In modern corporations the shareholders (principals) are
widely dispersed and they are not normally involved in the day to day operations and
management of their companies rather they hire mangers (agents) to manage the companies on
behalf of them (Habbash, 2010). The agents are appointed to manage the day to day operations
of the corporation. The separation of ownership and controlling rights results conflicts of interest
between agent and principal. To solve this problem or to align the conflicting interests of
managers and owners the company incurs controlling costs including incentives given for
managers. It is clear that the principal-agent theory is generally considered as the starting point
for any debate on the issue of corporate governance. According to Abrham, (2014) Agency
theory having its roots in economic theory was exposited by Alchian and Demsetz, (1972) and
further developed by Jensen and Meckling, (1976).

Jensen and Meckling, (1976) defined agency relationship as a contract under which the
principal engage another person or the agent to perform some service on their behalf which
involves delegating some decision making authority to the agent. If both parties to the
relationship are utility maximizes, there is good reason to believe that the agent will not always
act in the best interests of the principal. The principal can limit divergences from his interest by
establishing appropriate incentives for the agent and by incurring monitoring costs designed to
limit the irregular activities of the agent. According to agency theory the agent strive to achieve
his personal goals at the expense of the principal. Mangers are mostly motivated by their own
personal interests and benefits, and work to maximize their own personal benefit rather than
considering shareholders’ interests and maximizing shareholders wealth. To reduce agency
problem there must be better monitoring and controlling mechanisms which helps to ensure that
managers pursue the interests of shareholders rather than only their own interests and this could
be achieved through good CG practices.

The concept of corporate governance presumes a fundamental tension between

shareholders and corporate managers (Jensen and Meckling, 1976)15. While the objective of a
corporation’s shareholders is a return on their investment, managers are likely to have other
goals, such as the power and prestige of running a large and powerful organization, or
entertainment and other perquisites of their position. Managers’ superior access to inside
information and the relatively powerless position of the numerous and dispersed shareholders,
mean that managers are likely to have the upper hand (Fama and Jensen,1983).
I.1.2 STEWARDSHIP THEORY

In contrast to agency theory, stewardship theory presents a different model of

management, where managers are considered good stewards who will act in the best interest of
the owners (Davis and Donaldson, 1991). According to Smallman, (2004), where shareholder
wealth is maximized, the steward’s utilities are maximized too, because organizational success
will serve most requirements and the stewards will have a clear mission. The study states that
stewards will balance tension between different beneficiaries and interest groups. Therefore
stewardship theory is an argument put forward in financial performance that satisfies the
requirements of the interested parties. A steward, who improves performance successfully,
satisfies most stakeholder groups in an organization. Stewardship theory posits that concern for
their own reputations and career progression inhibits agents from acting against the interests of
shareholders, thus agency costs should be inherently minimized (Davis and Donaldson, 1991).

Stewardship theory supports that an insider-dominated board is more effective due to

more in-depth knowledge of organizational operations, such as access to data and technical
expertise. Additionally, CEO-Chairman duality will make leadership and control, particularly
regarding decision making and strategy more consistent, which is presumed to contribute to
greater effectiveness (Davis and Donaldson, 1991). Because the inside directors have more
comprehensive and deep knowledge of daily operations within firms, their decisions are better
informed. According to stewardship theory, they are therefore preferable to NEDs due to their
more accurate knowledge of financial performance. When the position of the CEO and Chairman
is held by a single person, the fate of the organization and the power to determine strategy is the
responsibility of a single person. Thus the focus of stewardship theory is on structures that
facilitate and empower rather than monitor and control (Davis and Donaldson, 1991). Therefore
stewardship theory takes a more relaxed view of the separation of the role of chairman and CEO,
and supports appointment of a single person for the position of chairman and CEO and a
majority of specialist executive directors rather than non-executive directors.

I.1.3 STAKEHOLDERS THEORY

Stakeholder theory is an extension of the agency theory, where the agency theory expects
board of directors to protect only the interests of shareholders. However, stakeholder theory
extends the arrow focus of agency theory on shareholders’ interest to stakeholders to take into
doing business. According to stakeholder theory the purpose of the firm is to serve and
coordinate the interests of its various stakeholders such as Shareholders, employees, creditors,
customers, suppliers, government, and the community at large. According to Habbash, (2010),
stakeholder refers to any one whose goals have direct or indirect connections with the firm and
influenced by a firm or who exert influence on the firms goal achievement. These include
management, employees, clients, suppliers, government, political parties and local community.
According to this theory, the stakeholders in corporate governance can create a favorable
external environment which is conducive to the realization of corporate social responsibility.

Moreover, the stakeholders in corporate governance will enable the company to consider
more about the customers, the community and social organizations and can create a stable
environment for sustainable development. The benefit of the stakeholder model emphasis is on
overcoming problems of underinvestment associated with opportunistic behavior and in
encouraging active co-operation amongst stakeholders to ensure the long-term profitability of the
business firm. According to Kyereboah-Coleman, (2007) management receive capital from
shareholders and depend on employees to accomplish the objective of the company but external
stakeholders such as customers, suppliers, and the community are equally important, and also
constrained by formal and informal rules that business must respect. According to stakeholders
theory the best firms are ones with committed suppliers, customers, and employees and
management. Recently, stakeholder theory has received attention than earlier because researchers
have recognized that the activities of a corporate entity impact on the external environment
requiring accountability of the organization to a wider audience than simply its shareholders.
Companies are no longer the instrument of shareholders alone as long as they exist within the
society. It has responsibilities to the stakeholders as well. However, most researchers argue that
it is unrealistic task for managers (Sanda et al., 2003).

I.1.4 RESOURCE DEPENDENCY THEORY

Whilst the stakeholder theory focuses on relationships with many groups for individual
benefits, resource dependency theory concentrates on the role of board of directors in providing
access to resources needed by the firm. According to this theory the primary function of the
board of directors is to provide resources to the firm and directors are viewed as an important
resource to the firm. When directors are considered as resource providers, various dimensions of
public policy makers, social groups as well as legitimacy. Boards of directors provide expertise,
skills, information and potential linkage with environment for firms. The resource based
approach notes that the board of directors could support the management in areas where in-firm
knowledge is limited or lacking. The resource dependence model suggests that the board of
directors could be used as a mechanism to form links with the external environment in order to
support the management in the achievement of organizational goals. The agency theory
concentrated on the monitoring and controlling role of board of directors whereas the resource
dependency theory focus on the advisory and counseling role of directors to a firm management.

Recently, both economists and management scholars tend to assign to boards the dual
role of monitors and advisers of management. However, whether boards perform such functions
effectively is still a controversial issue. Within a corporate governance framework, the
composition of corporate boards is crucial to aligning the interest of management and
shareholders, to providing information for monitoring and counseling, and to ensuring effective
decision-making. The dual role of boards is recognized. However, board structure has relied
heavily on agency theory concepts, focusing on the control function of the board (Habbash,
2010).

I.1.5 TRANSACTION COST THEORY

Unlike agency theory, transaction cost theory explicitly uses the concept of corporate
governance. This theory states that the company is a relatively efficient hierarchical structure that
serves as framework to run the contractual relationships. The main concern in transaction cost
theory is to explain the transactions conducted in terms of efficiency of governance structures.
The fatherhood of "transaction costs" was attributed to Ronald Coase, who in his famous article
The nature of the firm, in 1937, has built the judgment regarding the firm’s existence without
using, explicitly, the concept of transaction costs" but that of "cost of using the price mechanism.
Coase substantiates his argument about the nature of the firm by emphasizing that organizing the
production through the market channels (contracting by market) involves some costs. So, by
creating an organization which has the responsibility for resources allocation, some expenditure
can be avoided. Going forward, transaction cost theory is developed by Kenneth Arrow who
defines transaction costs as "operating costs of the economic system”.

Later, Williamson, founder of the transaction cost economics, believes that "the study of
must be taken into consideration, costs which are based on two sources: the costs inherent due to
an agent’s use (e.g., the risk that agencies use the company’s resources for their own purpose)
and costs involved by protecting against the risks associated with the use of an agent (e.g., the
costs of preparing the financial statements or costs consisting in the use of Stock-options
techniques to align the managers and shareholders’ interests.)

I.2 MECHANISMS OF CORPORATE GOVERNANCE

Mechanisms of corporate governance are those aspects that determine the presence of
corporate governance in an organization. We have both internal and external mechanisms of
corporate governance.

I.2.1 INTERNAL MECHANISMS OF CORPORATE GOVERNANCE

In the case of microfinance institutions, internal mechanisms of corporate governance

includes: Board Diversity, Board Size, Board Independence, CEO Duality.

I.2.1.1 BOARD DIVERSITY

The board diversity concept suggests that boards should reflect the structure of society
and properly represent the gender, ethnicity and professional backgrounds of those within it.
Boards of directors in a company need to have the right composition to provide diverse
viewpoints. Board diversity supports on the basis of moral obligation to shareholders,
stakeholders and for commercial reasons by obtaining extensive decisions (Daily A., et al.,
1998). Gender diversity is considered part of the broader conception of board diversity and many
scholars have shown that few women sit on corporate boards. When compared to men, most
women directors possess staff/support managerial skills, such as legal, public relations, human
resources and communications rather than operating and marketing skills. Based on the
indication given by many empirical studies, it is important to further explore the impact of
gender diversity of boards on MFI performance as it leads to better corporate governance
provides diverse viewpoints, values and new ideas to the boards and provokes lively boardroom
discussions.

I.2.1.2 BOARD SIZE

members and the smooth functioning of meetings. There is a belief that the number of directors
can affect the performance of a company, especially its financial performance. A number of
scholars have contended that larger boards have their benefits and when board size increases firm
performance also goes up as more board members provide greater monitoring, advice and make
available better linkages to the external environment (Daily A., et al., 1998). It is easier for larger
boards to monitor their managers’ activities more effectively, but it would be difficult for the
CEO to control the board.

I.2.1.3 BOARD INDEPENDENCE

The concept of board independence was grounded on agency theory. Independent board
members provide potentially greater oversight and accountability of operations, as they are less
likely to be subject to the principal-agent problem themselves. This is because as independent
members do not have inherent self-interests per se and are instead guided by the interests of the
stakeholders who appointed them (La Porta et al., 1999). For this reason, a greater percentage of
independent members in the boards should promote positive performance. There are many
different measurements on the composition of the governing board, and these are varied as
number of directors, number of outsiders and number of independent directors in the board.

I.2.1.4 CHIEF EXECUTIVE OFFICER DUALITY

CEO duality occurs when the CEO and chairman positions are held by the same person in
an organization. Board leadership structure is an important corporate governance mechanism,
which is reflected in the positions of chairman of the board and CEO. Both agency theory and
stewardship theory have addressed the leadership structure of the board. Separation of the role of
CEO and chairman of the board is largely grounded in the agency theory (Daily A., et al., 1998).
which assumed that due to the agency problem, it is necessary to monitor the performance of the
CEO and the board to protect the stakeholders’ rights including shareholders.

According to Lam and Lee, (2008)16 combining the role of chair of the governing board
and the CEO might result in CEO dominance, which will lead to ineffective monitoring of the
management and monitoring by the board. Advocates of stewardship theory argue that
combining the two roles strengthens the leadership and empowers the leader to quick action
especially on critical decisions. Research has proven that combined leadership structure has a
I.2.2 EXTERNAL MECHANISMS OF CORPORATE GOVERNANCE

The state and other external regulatory authorities need to take part in the corporate
governance nature of an organization. External corporate governance mechanisms within the
framework of microfinance consist of: indirect intervention of the state, direct intervention of the
state, forms of state intervention.

I.2.2.1 THE INDIRECT INTERVENTION OF THE SATE

This intervention involves essentially the relationship of the principal who confines his
resources to an agent. The agent has as obligation to give accounts to the principal. The account
giving by the agent has to be credible in the eyes of the principal thanks to the intervention of
neutral agents such as an external auditor and an accounting expert to evaluate, monitor and
control the external situation of the organization (Maati, 1999).

I.2.2.2 THE DIRECT INTERVENTION OF THE STATE

According to Maati, (1999), the state can directly intervene in diverse ways: firstly, she
can monitor the activities of an enterprise through the position of shareholders reference.
Furthermore, the state intervenes generally through a set of laws, rules and legislative measures
and also those rules that imposes norms of behavior to the different actors of the organization
notably directors/managers and assures the total application of the judiciary system. The state
also intervene through the control of the financial market effectuated by special organisms, in
view of protecting savers when the visibility becomes very bad, control is effectuated though the
information published by companies quoted in the stock exchange in terms of the fastness of
emission and sincerity.

I.2.2.3 FORMS OF STATE INTERVENTION

In a country like Cameroon which is in its development phrase, and in transition towards
the economic market, scholars think that the intervention of the state can be justified by the
failure of the market and on the other hand the promotion of a liberty company which exercises
the reforms of the state. In effect, according to the same author, the state intervenes in the
economy in diverse ways; firstly through reglementation and dereglementation because it
produces a set of reglemented dispositions which touches all aspects of economic life. In effect,
dispositions and others to ensure their strict application. To conclude on this section, we see that
corporate governance in its entity is a very broad concept. Despite its broad nature, its
implementation in the microfinance sector is very important for its good management and
sustainability.

I.3 MEASUREMENT OF CORPORATE GOVERNANCE

To encourage the implementation of the best corporate governance practice, various

institutions have developed corporate governance indexes to rank companies by the level of
compliance to best practices.

I.3.1 GOVERNANCE INDEXES OF PROFESSIONAL RATING SERVICES

Professional ratings agencies come up with various governance rating methodologies

which are capable of measuring governance scores of companies. These scores provide the basis
for rankings and evaluating effective implementation of best governance practices. They include
Governance Metrics International Rating (GMI, 2010), the corporate governance Quotient of the
Institutional Shareholders Services (CGQ, 2010), the Corporate Governance Score of Standard
and Poor’s (CGS, 2010) and the Board Effectiveness Rating (BER, 2010) of the Corporate
Library. Most of these rating services obtain required data for developing rating scores from the
publicly available sources. These rating systems are developed covering the aspects and
determinants of governance mechanisms such as board characteristics, ownership structure etc.
Allen et al., (2004) analysed aspects included by these governance rating systems. These
governance ratings focus on several general categories namely; board characteristics, ownership
structure, compensation plans, anti-takeover devices, financial disclosers, internal control and
director education.

I.3.2 CORPORATE GOVERNANCE REGULATION INDEXES

The economic effects of corporate governance regulation have received much academic
attention in recent years. La Porta et al., (1999) investigate empirically the relationship between
law, economic growth and governance of firms. They develop the tools that enable researchers to
compare institutional environments across countries and to study the effects of corporate
regulation. Martynova and Renneboog, (2007) developed new governance regulation indices to
the rights of above mentioned stakeholder groups. Three governance regulation indices have
been constructed: namely: (i) the shareholder rights protection index, (ii) the minority
shareholders protection index and (iii) the creditor rights protection index. The variables for each
of the indices have been identified based on the regulatory provision of the law system of the
country. The indices indicate how the law in each country addresses various potential agency
conflicts between main stakeholder groups.

This section has on the one hand presented an overview of the traditional and
fundamental theoretical perspectives of corporate governance and highlighted the corporate
governance mechanisms (internal and external mechanisms). And on the other hand it depicted
the measurement index of corporate governance.

SECTION II: THE INCIDENCE OF CORPORATE GOVERNANCE

ON FINANCIAL PERFORMANCE

The waves of corporate scandals in developed countries indicate that there is much room
for improvement of governance practices even in countries with well-functioning markets and in
industries with established mechanisms of control. The main objective of this section is to
present the theoretical relationship that exists between corporate governance and financial
performance.

II.1 DEFINITION OF FINANCIAL PERFORMANCE

Performance can be defined in many ways. It has been defined as the amount of utility or
benefits derived from the firm or the organization by its stakeholders (Rashid, Islam and
Anderson, 2008). The continued viability of an institution depends on its ability to earn adequate
return on its assets and capital. Good earnings performance enables an institution to fund its
expansion, remain competitive in the market, replenish and increase its capital evaluation of
earnings. Financial performance can be termed as a subjective measure of how well a firm can
use Assets from its primary mode of business and generate revenues. It is also referred to the
general measure of a firm’s overall financial health over a given period of time and can be used
to compare similar firms across the same industry or to compare industries or sectors in
 Information on financial performance is useful in predicting the capacity of the enterprise
hence analyzing how well or poorly an enterprise is doing against its set objectives, the same
observation regarding the measurement of financial performance is made by (Avkira, 1995)
when he states that generally financial performance of business organizations can be measured
using a combination of financial ratios analysis, benchmarking, measuring performance against
budget or a mix of these methodologies. According to Trai, (2005), financial performance
improvement is a key target for all businesses irrespective of their size (large, medium or small),
type (listed or not listed) or sector (private or public).

II.2 DETERMINANTS OF FINANCIAL PERFORMANCE OF MFIS

Muriu, (2011) pointed out that the determinants of MFIs profitability can be divided into
two main categories namely the internal determinants which are management controllable and
the external determinants, which are beyond the control of management.

II.2.1 MFIs-SPECIFIC DETERMINANTS (INTERNAL)

The internal determinants of MFIs financial performance are those management

controllable factors which account for the inter-firm differences in profitability, given the
external environment.

II.2.1.1 PORTFOLIO QUALITY

Portfolio indicates to total funds available for the MFI to use as loans to its clients.
Portfolio quality is a measure of how well or how best the institution is able to protect this
portfolio against all forms of risks. The loan portfolio is by far a MFI’s largest asset (Nelson,
2011). Portfolio quality is a critical area of performance analysis, since the largest source of risk
for any financial institution resides in its loan portfolio. For microfinance institutions, whose
loans are typically not backed by bankable collateral, the quality of the portfolio is absolutely
crucial (American Development Bank, 2003 cited in AEMFI, 2013)

Portfolio quality is a vital area of analysis, since it is the largest source of risk for any
financial institution. Empirical study undertaken by Lafourcade et al., (2006) Overview of the
Outreach and Financial Performance of Microfinance Institutions in Africa by taking 163 MFIs
from 25 countries show that MFIs around the world continue to demonstrate low PAR > 30 days,
from their books or refinance the loans by extending the term, changing the payment schedule, or
both. The result shows that loan at risk is negatively correlated with MFIs financial performance.

II.2.1.2 CAPITAL ASSET RATIO

The capital to assets ratio is a simple measure of the solvency of MFIs. This ratio helps a
MFI assess its ability to meet its obligations and absorb unexpected loss. The determination of an
acceptable capital to asset ratio level is generally based on a MFIs assessment of its expected
losses as well as its financial strength and ability to absorb such losses. Expected losses should
generally be covered through provisioning by the MFI‟s accounting policies, which removes
expected losses from both assets and equity. Thus, the ratio measures the amount of capital
required to cover additional unexpected losses to ensure that the MFI is well capitalized for
potential shocks. Dietrich and Wanzried, (2009) carried out a retail banking research and
concluded that the capital ratio, which is defined as equity over total assets, has a positive and
significant effect on bank profitability in Switzerland as measured by the return on average assets
ROAA.
According to Muriu, (2011), capital adequacy has robust and significant positive
association with MFI profitability. This is depicted by the relatively high coefficient of the equity
to assets ratio across the specifications this effect remains so even after the inclusion of the
external factors. Intuitively, this is an indication that well capitalized MFIs are more flexible in
dealing with problems arising from unexpected losses and are confronted with a reduced cost of
funding or lower external funding.

II.2.1.3 OPERATIONAL EFFICIENCY

Dissanayake, (2012), Operating efficiency is proxies by operating expense ratio which is

adjusted operating expense divided by adjusted average gross loan portfolio and concludes that
Operating Expense Ratio, are statistically significant predictor variables in determining Return
on Assets Ratio. Operational Efficiency is an internal determinant of performance that shows
how well MFIs is streamlining its operations and takes in to account the cost of the input and the
price of output. Efficiency in expense management should ensure a more effective use of MFIs
loan able resources, which may enhance MFIs profitability. Higher ratios of operating expenses
to gross loan portfolio show a less efficient management. Operational efficiency in managing the
operating expenses is another dimension for management quality. Ongore and Gemechu,
II.2.1.4 GEARING RATIO / DEBT TO EQUITY RATIO

The debt to equity ratio is calculated by dividing total liability by total equity. Total debt
includes everything the MFI owes to others, including deposits, borrowings, account payable and
other liability accounts. The debt/equity ratio is the simplest and best-known measure of capital
adequacy because it measures the overall leverage of the MFIs (AEMFI, 2012). The debt to
equity ratio is a common measure used to assess a firm’s leverage, or in other words the extent to
which it relies on debt as a source of financing (Lislevand, 2012)17. Microfinance institutions
that employ higher debt in their capital structure are more profitable, and highly leveraged
microfinance institutions are more profitable. Besides, a higher debt ratio can enhance the rate of
return on equity capital during good economic times (Muriu, 2011).

According to Nelson, (2011), gearing ratio is the proportion of equity and debt the
company is using to finance its assets. This is very much connected to where the MFI is located
in its life cycle. Traditionally, the funding structure follows a certain pattern over the life cycle of
an MFI. Start ups are characterized by a larger dependency on donations, usually in the form of
equity grants, whereas the more mature MFI‟s tend to display higher debt leverage through
borrowing and even evolve into a formal institution or a regulated niche bank. Some MFI’s even
access capital markets by issuing bonds or by going public (IPO).

II.2.2 MACROECONOMIC VARIABLE (EXTERNAL DETERMINANTS)

Real GDP: The study used real GDP growth as a proxy of the macroeconomic
environment. Arguably, this is the most informative single indicator of progress in economic
development. Poor economic conditions can worsen the quality of the loan portfolio, thereby
reducing profitability. In contrast, an improvement in economic conditions has positive effect on
the profitability of MFIs, (Muriu, 2011)18. Thus, the variable is expected to exhibit positive
relationship with MFIs profitability. According to the study undertaken by Imal et al., (2012)
working paper entitled financial performance of microfinance institutions a macroeconomic and
institutional perspective drawing up on the Microfinance information exchange data and cross-
country data on macro economy, finance and institutions and use Hausman-Taylor to take
account of endogenuity and they found GDP have positive impact on MFIs financial
performance.
II.3 INDICATORS OF FINANCIAL PERFORMANCE

Performance indicators are at the heart of a performing organization’s monitoring system.

They define the data to be collected to measure progress and enable actual results achieved over
time to be compared with the planned results (Xu and Wang,1997)19. There are various measures
of performance to determine financial and non -financial performance such as Return On Assets,
Return On Equity, Operational Self Sufficiency, Financial Self Sufficiency. The researcher
intends to use Return on Equity (ROE) and Return On Assets (ROA) performance indicators to
determine the financial performance of the MFIs. Financial measures of performance analyses
the financial statements of a business enterprise. There are three statutory financial statements,
i.e., the income statement, the balance sheet and the cash flow statement. Financial statement
analysis seeks to evaluate management's performance in several areas including profitability, risk
and efficiency.

II.3.1 RETURN ON ASSETS

Return on Assets (ROA) indicates how well an MFI is managing its assets to optimize its
profitability. The ratio includes not only the return on the portfolio, but also all other revenue
generated from investments and other operating activities. If an institution’s ROA is fairly
constant, this ratio can be used to forecast earnings in future periods. Unlike ROE, this ratio
measures profitability regardless of the institution’s underlying funding structure; it does not
discriminate against MFIs that are funded primarily through equity.

Therefore, ROA is a good measurement to compare commercial and noncommercial

MFIs. In fact, non-commercial MFIs with low debt/equity ratios can often achieve higher ROA
than their commercial counterparts because they have low financial expenses and pay fewer
taxes. ROA should be positive. MFIs have achieved unusually high ROA in recent years. A
positive correlation exists between this ratio and Portfolio to Assets; the ratio is higher for
institutions that maintain a large percentage of the assets in the Gross Loan Portfolio. It is
calculated as follows:

=
II.3.2 RETURN ON EQUITY

ROE or "Return On Net Worth" (RONW) is the most significant profitability measure to
investors. To the investor, the measure reports the returns on dollar invested to permit
comparisons across firms. Return on equity measures a corporation's profitability by revealing
how much profit a company generates with the money shareholders have invested. The ROE is
useful for comparing the profitability of a company to that of other firms in the same industry.
ROE encompasses the three pillars of corporate management, profitability, asset management,
and financial leverage. To the management, the ratio is vital because it can be dissected to reveal
sources of financial performance. If the ratio is higher than the industry average, this may
indicate poor management of working capital. If the ratio is too low, this may not be bad if the
current assets are very liquid (cash and securities) (Xu and Wang', 1997). ROE is calculated by
dividing total profit after tax and interest payment s by total equity. It is calculated as follows:

Net Operating Income − Taxes

=
Average Equity

II.4 THE IMPACT OF CORPORATE GOVERNANCE ON THE FINANCIAL

PERFORMANCE OF MICROFINANCE INSTITUTIONS
Governance in microfinance refers to the mechanisms which ensure donors, creditors and
equity investors, that their funds will be used according to the intended purposes. Good
governance in the Ethiopian deposit taking MFIs plays an important role in increasing outreach,
improving transparency, accountability, sustainability, profitability, efficiency, effectiveness,
responsibility and responsiveness to the changing environments (Amha, 2008).

The ultimate goal of microfinance industry is to contribute to development and

alleviation of poverty through reaching for low income productive poor people. To achieve this
goal MFI in Cameroon should be financially strong enough. Therefore, MFI profitability is a
paramount. There are factors that lead MFI financial performance either weak or strong. Various
researches have been done on such factors. One of the focuses was corporate governance. Even
though many studies have been conducted to identify the relationship between corporate
corporate governance practices in relation to MFIs is still at an immature stage and it is important
to conduct more studies in this field to enhance MFIs’ development.

The paramount risk facing the microfinance sector in Sub-Saharan Africa is that of
governance, and more precisely risk governance. Within governance, there is a lack of
appreciation and understanding of the role that risk management should play within a financial
institution. (The CSFI survey of Microfinance Risk, 2014). According to (Thrikawala, 2013)
there is need for further empirical research for MFIs using micro econometric techniques, such
as regression analyses of panel data to support the conceptual literature currently available. His
finding encourages MFIs to consider further significant governance factors which will improve
and sustain the industry. Chenuos et al., (2014) found that good governance structure is
important in the young and immature microfinance industry as it has an effect on the institution
performance. The researchers concluded that corporate governance practices have an influence
on MFI performance in Kenya.

Ms.S.Danoshana et al., (2013) documented that corporate governance practices of Board

Size, Meeting Frequency and Audit Committee Size have significant impact on firm
performance and Board Size and Audit Committee are positively related with firm’s performance
but Meeting Frequency has negative relation. Further, researcher concluded that, corporate
governance can be improved in Sri Lanka if companies maintain their board size to nine
directors, meetings to once a month and audit committees to four members. The board of
directors is an internal governance mechanism that helps resolve the agency problems between
owners and managers. Board members are elected by shareholders to monitor and advice
managers on behalf of owners. The degree of alignment of board composition and shareholders’
objectives is measured in the empirical corporate governance literature by the proportion of
outside/independent directors (Hartarska, 2004).

In MFI, board Members are the ultimate decision maker and stewards of the
shareholders’ investment with fiduciary responsibility as well as the duty to balance the social
mission and financial objectives of MFIs. Effective governance depends primarily on the skills
and characteristics of the individual directors. Collectively, these attributes should represent a
diverse set of experiences, backgrounds, area of expertise, ethnicity and gender (Ayalew, 2007).
In spite of the generally accepted notion that effective corporate governance enhances MFI
sector, Meeting frequency of Board, Audit committee size, CEO duality and CEO gender) and
management control.

From the review of this first part of our work, microfinance institutions can develop and
improve the quality of their corporate governance structures. In this part, we have looked in to
the concepts and presentation of key words of the study. The concept of corporate governance
has been well elaborated as well as that of financial performance in the microfinance context.
Within the framework of the above concepts, we discover that corporate governance is not a new
concept and that its application to businesses has an impact on its performance and survival. We
have also seen that the way corporate governance is applied in other organizations is not the
same like in the microfinance institutions because of its twofold objective which entails the
institutions to work towards financial sustainability and the social welfare of her customers and
investors. Talking of deficiencies we are going to see in the second part of our work, the impact
of corporate governance on the financial performance in MFIs.
 PART TWO:
THE IMPACT OF CORPORATE GOVERNANCE ON THE FINANCIAL PERFORMANCE
OF MFIS IN CAMEROON’S NORTH WEST REGION
 The N.W region of Cameroon is remarkable for the numerous MFIs which are located in
this area. Given the fact that it is not an exception to the high competition MFIs face nowadays
because of the increase growth which booms the micro finance sector, MFIs in this region as
well face difficulties in their operational accountability and transparency due to imperfect
information and incomplete contracts a result of such growth. The management of these MFIs
are not ignorant of the existence of such threats, the more reason why they are awaken today
with the implantation of an internal control system which can help minimize their risks.20
However, these risks vary from credit, liquidity, foreign exchange, interest rate, fraud, human
errors … and also have a high changing profile due to the evolution of the sector itself. However,
we are not going to leave out the fact that there exist different aspects of internal governance as
well as different types of performance MFI might be exposed to. But this research is delimited to
financial and economic profitability which are internal to the institution.

Notwithstanding, a scientific research can be defined as a dynamic process or a rational

approach which help to examine phenomena, problems to be solved and to obtain precise
answers through investigation. It also seeks to describe, identify, and control relationships among
phenomena in order to study them. This research work is systematic and rigorous and leads to
the acquisition of new knowledge. Our main interest in this part is to bring out the impact the
governance structure set up by MFIs in the N.W region, has on their financial sustainability.
Therefore the second part of our work will consecrate on practical aspect of our research. It has
two chapters: in chapter three, we are going to present the methodological approach of the
minimization of risk; meanwhile chapter four will consist of explaining the evident relationship
between corporate governance and financial performance.
 CHAPTER THREE:
METHODOLOGICAL APPROACH IN THE APPRAISAL
OF CORPORATE GOVERNANCE IN MFIS

An important dilemma which research must deal with is how we know we have found the
answer to the research question posed. There are different methods which research can use to
answer the questions which it poses. It is advisable for every researcher to select appropriate
method with which to study the research problem. The research design will ensure that the
evidence obtained enables to answer the initial question as unambiguously as possible and draw
a concrete and convincing conclusion.21 The first section of this chapter will describe the
research design adopted and the second will present the plan of data analysis.

SECTION I: DESCRIPTION OF RESEARCH DESIGN

Research design refers to a logical task undertaken to ensure that the evidence collected,
enables us to answer questions or to test theories as unambiguously as possible. In this section,
we are going to see the logical structure of the research design and the sampling plan.

I.1 LOGICAL STRUCTURE OF RESEARCH DESIGN

Generally, the research design or a structure has to be defined before data collection or
analysis can commence. We are going to see the structure of the research design and approach,
and as well identify and operationalized our concepts.

I.1.1 THE STRUCTURE OF RESEARCH DESIGN AND RESEARCH APPROACH

The logical structure of inquiry, which is the research design, is different from the
method through which data are collected.22 The development of research designs depends on
whether the research question is descriptive, explanatory or exploratory.

I.1.1.1 THE STRUCTURE OF RESEARCH DESIGN

The structure of research design brings out the logical link between the research
research problem which is: what is the impact of corporate governance on the financial
performance of MFIs?, from which is derived our main research objective that aim to show that
in MFIs corporate governance has a significant impact on financial performance, it can be seen
our work is based on the question “what?”. This implies the purpose of this research is
explanatory and predictive.

Our research is an explanatory and predictive study since it enables us to explain or

predict the phenomena studied. The study enables us to bring out the level of interdependence or
association between two or more variables and the verification of causal hypothesis in predicting,
explaining and controlling the causal relation between corporate governance and financial
performance in MFIs which are the main variables of our study. The expression of such relation
is done traditionally under the form Y = f(X). Any research design can in principle, use any type
of data collection method and can use either quantitative or qualitative data (Marsh, 1982).

I.1.1.1 RESEARCH APPROACH OR METHOD RETAINED

According to Victor TSAPI, (1999), “the choice of a methodological approach depend on

the advancement of theoretical knowledge on the topic, the concept used and most of all the
objectives fixed by the researcher”. Therefore the choice of a given approach or method depends
on the state of prior knowledge on the topic and the purpose of the research. Basically, there
exist two research approaches being the qualitative and the quantitative approach. Though there
do not exist any fundamental difference between quantitative or qualitative research as proposed
by BRABET, we are not going to ignore the fact that, when talking of qualitative approach we
are faced with the question “why and how” and quantitative approach we try to answer the
question “what”.

The qualitative research approach can therefore be defined as that which is based on the
use of open techniques like interview guide and apprehend phenomena and behavior in an
exhaustive manner, bringing out pertinent information in a domain where the basic concepts are
still unknown (exploratory study). Meanwhile the quantitative approach is generally based on
instruments and techniques of collecting data whose assurance and validity is assured in
principle. It as well axed on the projection of phenomena and behavior of a given population. It
is also based on natural scientific methods which are appropriate to bring out the vision of the
social world as a concrete structure.23
 Our topic on research has already been explored especially in the theoretical aspect
though not to a greater extend as regards the changing nature of financial and corporate
governance practices. Most books on corporate governance present their main focus on
transparency which is an indicator of good governance. We are going to therefore use the
quantitative approach or method since we are aimed at collecting observable and quantifiable
data. It can also explain the phenomena basing on facts and positive events. This research
method leads to numerical data which enables us to analyze tables and graphs, statistical analysis
of research of links between variables, analysis of correlation or association …

The epistemological position is determined from a choice between hypothetic-deductible

or inductive approaches. Given that our research approach is quantitative, in which a deductive
approach is adapted as described by the scientific research cycle; as a process that moves from
theory to the formulation of hypothesis then observation and later the testing of these hypothesis
to confirm theory, and also considering the fact that we have formulated hypothesis as probable
answers to our research questions, we are going to adopt the hypothetic-deductible.

I.1.2 IDENTIFICATION OF CONCEPTS

As for QUIVY and CAMPENHOUDT “there is no observation or experimentation which

is not based on hypothesis and when this hypothesis is not explicitly constructed, collected
information is partial, or simply unusable and cannot confirm anything other than the
unconscious prejudices that guides data collection”.24 The formulation of hypotheses is a crucial
step in research. GASTON BACHELARD also affirms that “when we do not know what we are
looking for, we do not know what we find”.25Hence, the need to introduce research hypotheses
and operationalize concepts.

I.1.2.1 HYPOTHESIS AND VARIABLES OF RESEARCH

Our research is carried out under the context that, to remain competitive, MFIs are
undertaking product and geographical expansion, which introduce new risks and challenges
imposed by rapid growth and opportunistic behavior. As MFIs grow and more operate as
regulated financial intermediaries, corporate governance becomes essential to long-term
institutional sustainability. MFIs nowadays therefore, are faced with the challenge of
implementing a quality of management control that can enable them to master and better manage
impact of corporate governance on the financial performance in MFIs. As probable solution to
this research problem we formulated two research hypotheses.

Hypothesis 1: Management control positively influences the financial performance of MFIs.

Brown (2004) carried out a study to measure corporate governance and firm performance
and he found that better-governed firms were relatively more profitable, more valuable, and paid
more dividends to their shareholders. This study aligns its first hypothesis on the basis of
previously confirmed conceptual link between governance and performance by Brown (2004).

Hypothesis 2: Board composition enhances the financial performance of MFIs

Our second hypothesis as presented above was established based on the works of Brown
and Caylor. Brown and Caylor (2004) observed that good governance has positive impact on a
firm’s financial performance. The study was based on a Gov-Scorebing composite measure of
51factors encompassing eight corporate governance categories i.e. audit, board of directors,
charter or by-laws, director education, executive and board composition, ownership, progressive
practices and state of incorporation.

According to Quivy and Campenhoudt, (1995), hypotheses are a proposition which is

anticipating a relationship between two concepts or phenomena. Hypothesis can be defined as “a
speculative proposition on the relationship between two variables”26 In order to better understand
the relationships displayed by the above hypotheses, we are going to identify the variables that
are contained in the above hypotheses.

Table 5: Identification of variables

VARIABLES
HYPOTHESES Explanatory variables Variable explained
(independent) (dependent)
Hypothesis 1 (H1) Effective management control Financial performance
Hypothesis 2 (H2) Board composition Financial performance
Source: Our own construction

Since we have clearly defined the research hypothesis, in order to reconcile these
hypotheses with reality or confront it with observation, it is necessary to operationalized the
concepts.
 I.2 OPERATIONALIZATION OF CONCEPTS AND RESEARCH MODEL

Operationalization is the process of converting concepts into their empirical

measurements, or of quantifying variables for the purpose of measuring their occurrence,
strength and frequency.

I.2.1 OPERATIONALISATION OF CONCEPTS

Indicators can be defined as signs, behavior, or reactions which are directly observable
through which at the level of reality, the dimensions of a variable can be seen.27 Therefore, we
are going to operationalised our concept by associating them to variables then corresponding
indicators and lastly items, which could help us to distinguish with exactitude the variations
observed in reality in relation to the concept. These concepts operationalized below:
Table 6: Operationalisation of concepts
CONCEPT VARIABLES Dimension
Information system
Mastery of Transactions
Effective reporting of income to the board
Effectiveness of Effective reporting of expenditure and investment to the board
management
Corporate Governance

Report on capital management

control Report on predefined target and excess returns
Audit Committee
Size of audit committee
Size of the board
Number of women on the board
Remuneration Committee
Board
Legal Committee
Composition
Number of board members with college degree
Board of directors with industry specific experience
Board of directors with business management experience
Ratio of net income over total book value of equity (ROE)
Economic
Operational Self-sufficiency (OSS)
Financial Profitability
Subsidy Dependency Indicator (SDI)
Performance
Financial Ratio of net income over total book value of asset (ROA)
Profitability Adjusted Return on Asset (AROA)

Source: Our construction

 From the above table of operationalisation, our research simplified model is deduced and
presented in the next sub section.
I.2.2 SIMPLIFIED RESEARCH MODEL

A model is a schematic description of a system, theory, or phenomenon that accounts for

its known or inferred properties and may be used for further study of its characteristics.
Therefore after having reviewed literature on our variables, we established the model below.

Figure 01: Research model

Management
Control H1
Financial
Corporate
Performance
Governance
H2
Board
Composition

Source: Our construction

From the model constructed above we are going to test and verify our hypotheses already
stated and realize our objectives in the next chapter of this part. After presenting the various
variables and corresponding indicators, it is necessary to present the instrument with which data
is going to be collected and the description of the sampling plan from which this data is obtained.

I.3 INSTRUMENT OF DATA COLLECTION AND SAMPLING PLAN

According to AVERNIER, empirical research designed to test hypotheses or to search for

regularities in a phenomenon, can use two methods of investigation: the secondary data or
enquiry.28 The choice of instrument of data collection highly depends on the method of
investigation and the method of investigation also determines the sampling plan.

I.3.1 THE CHOICE OF INSTRUMENT OF DATA COLLECTION

The access to information from many enterprises is a difficult task in Africa

(OUATARA, 1999). This is why researchers are always advised to use the simplest approach in
order to easily obtain information they need for their research. Nevertheless, before choosing any
 The verification strategy is the choice we make in relation to the number of cases to use
and the type of research to realize to assure the most complete verification of hypothesis as
possible. This decision is important in that; the determination of the nature of observation, the
type of information to collect and the type of treatment of data depends on it. One of the most
solicited verification strategy in social sciences is enquiry. An enquiry is the search for
information realized by a systematic interrogation of subjects of a given population. This strategy
favors the use of questionnaire, sampling and interview and therefore helps in the statistical set.

In this our research, the method of investigation, we are going to use is an enquiry since
we are going to be interrogating just a given unit of the total population will be interrogated.
Because of this we deemed it necessary to prepare as instrument or tool of data collection, a
questionnaire that we are going to administer to the sample population we are going to defined.

A questionnaire is an instrument used for collecting quantitative data and consists of a set
of questions presented to respondents for their answers. The choice of use of questionnaire is
because of its flexible nature. This questionnaire consists of closed-end questions, pre-specifying
all the possible answers, and as well as opened-end questions which allow respondents to answer
in their own words. It as well consists of questions in the form of LIKERT measurement scale at
five levels. The closed end questions provide answers easier to interpret and tabulate. Opened-
end questions, seek to know what people think rather than in measuring how many people think
a certain way.

I.3.2 DESCRIPTION OF THE SAMPLING PLAN

On designing the sample plan, we asked three main questions: 29 who is to be surveyed?
How many people should be surveyed? How should the respondents be choosen?

I.3.2.1 TARGET POPULATION AND ACCESSIBLE POPULATION

The target or total population refers to that which a researcher wish to study and from
which results are generalized. In this our research the target population is all Microfinance
establishments in Cameroon. The principal MFIs in Cameroon include: Cameroon Cooperative
Credit Union League (CAMCUL), Unity Cooperative Society (UNICS), Mutuelle
Communautaires de Croissance (MC²), Caisses Villageoise d’Epargne et de Credit (CVECA),
30
consists of all MFIs in the N.W Region, making up a population of study from which a sample
population will be determined. This population of study concerns all MFIs in the North West
Region of Cameroon irrespective of neither their category nor the network they belong to.
Notwithstanding, in regards to our set objectives, this choice of accessible population is as a
result of the fact that Micro financing in Cameroon started in the N.W Region and Bamenda is
the third highest town in Cameroon that hosts MFIs. The oldest MFI in the country is found in
the NW Region (NJINIKOM, May 1954; Nso, 1965).

We talk of a survey when all the units of the target population are interrogated, but due to
some financial, human, and material resource limitations, we could not interrogate the entire
target population. Hence, after determining this target population, we deemed it necessary to
determine the sample.

I.3.2.2 SAMPLING PROCEDURE

Considering the difficulties usually encountered by researcher to obtain a sample frame,

various quasi-random sampling methods are usually used. We are going to proceed with the
sampling method used to come out with the sample size that we will obtain. Sampling is the
process of examining a representative set of items, people or things out of the whole population
or universe.31 Probability sampling allows the calculation of the confidence limits for sampling
error. When the cost or time involved in probability sampling is too high, researchers will take
non-probability samples. The researchers feel that non-probability samples are very useful in
many circumstances, even though they do not allow sampling error to be measured.

In this our research, we do not have better knowledge of our target population and due to
the limited time in travelling, we are going to use the multi-stage or stratified sampling method
in order to obtain our sampling size. Multi-sample is a practical system which is widely used to
reduce the travelling time for researchers and the subsequent costs. This sampling method is
similar to stratified sampling except that the groups and sub groups are selected on a
geographical basis rather than some social characteristics. Our accessible population is all MFIs
in the North West Region of Cameroon. We are going to divide this region into divisions. This
region has seven divisions all together; Mezam, Momo, Boyo, Menchum, Ngoketunjia, Bui and
Donga Mantung. From each of this region would be drawn a random sample of MFIs to
interrogate. This implies we can proceed with the probability sample in order to obtain this
sample population: precisely the simple random sampling method, where every MFI of a given
region has an equal chance of selection.

I.3.2.3 SAMPLE SIZE

Given the general objective of our research, which is to show that in MFIs corporate
governance has a significant impact on financial performance, the units of our target population
have equal chances to contribute to the results of the research obtain. In order to generalize our
results, our sample population or size has to be representative. This sample size depends on the
reliability and cost of accessing this population. However, it is not necessary to sample the entire
target population or even a substantial portion to achieve reliable results. Our sample size
therefore is a portion of the target population, which has the same characteristics as this main
population, set aside for inquiry.

The generalization of results following the principle of the normal law is generally,
accepted for sample size (n) greater than or equal to 30 (n ≥ 30)32. This implies, in order to
obtain a sample size of not less than 30 MFIs from our target population, using the multi-
sampling method described above, we are going to draw randomly from each of the seven
divisions of the N.W Region. Given the large number of MFIs in the entire N.W region and
considering the time constraint we are exposed to in order to administer our questionnaire, we
are going to set our sample size according to the time available to administer our questionnaire.
Due to fact that we have just one month to administer our questionnaire in the seven divisions of
the region, we decided to send 8 questionnaires for each division which make a total of 56
questionnaires for the entire N.W region. Only 46 of these questionnaires were returned maybe
due to refusal of responding, or other reasons which constitute the limitations in using a
questionnaire as tool of data collect.

The purpose of this section was to identify our field of study and understand the research
design and methodology. Therefore, it was important to be clear about the role and purpose of a
research design before examining type of research design we used. Nevertheless, what is
important is that we obtained data during this research and it will be necessary for us to present
the data analysis plan used to analyze this data.
SECTION II: DATA ANALYSIS PLAN AND CHARACTERISTICS
OF TARGET POPULATION

Once the nature of research data to be collected with the aid of different types of data
collection procedures has been defined, the next phase of the research is to describe how this
data can be analyze. Thus, data analysis becomes the product of all the considerations involved
in the design and planning of the research. In this section, we are going to precise the techniques
used in analyzing data and the characteristics of the sampled population.

II.1 TECHNIQUES OF ANALYSING DATA ADOPTED

A variety of techniques are available for analyzing data, as with the data collection
procedures. We are going to give the data analysis and the design of study as well as the
statistical techniques retained in analysis the data collected in this our research.

II.1.1 DATA ANALYSIS AND THE DESIGN OF STUDY

Data analysis refers to the sifting, organizing, summarizing, synthesizing of data so as to

arrive at the results and conclusions of the research. The selection of a specific data analysis
technique will depend mainly on the nature of the research problem, the design chosen to
investigate it and the type of data collected.33 Thus, in the data analysis phase, the researcher
does not have much choice as to the specific data analysis technique to use. Data analysis is
therefore valuable to the extent that there is a valid relationship between it and the other
components of research.
Figure 02: Dependence of the data analysis technique
The research problem

The research design

The data collected

The data analysis technique

Source: Herbert W. SELIGER and ELANA SHOHAMY, (1989), p. 23.

qualitative research. In quantitative research data is in numerical form, or some form which can
be converted into numbers, and the analysis almost always utilizes statistics. Qualitative data
analysis techniques deal with non-numerical data, usually linguistic units in oral or written form.
Most often statistical techniques carried out with the aid of a computer by using variety of
available statistical packages are used for analyzing research data

Parametric statistics, although having a number of set assumptions are far more powerful
than non parametric statistics. Non-parametric statistics used nominal and ordinal data and have
in general, weaker assumptions but they are also less powerful in the sense that it is possible to
utilize them for rejecting the null hypothesis at a given level of significance. However, if any of
the assumptions of the parametric statistics are violated, a non-parametric test is used since they
do not make assumptions about the shape of the distribution and are usually used when data
represent ordinal and nominal scale (Seigal, 1956, Hollander and Wolfe, 1973).34

II.1.2 STATISTICAL TECHNIQUES RETAINED

Data analysis is the core of a scientific research since it contributes to the theoretical
development of a given discipline. Before exploiting data collected from our enquiry, a
computerized treatment of such data is necessary in order to give it a scientific sense.
Information or facts have to be isolated grouped and classed in categories in tables, graphs …
this is the only means to enable large quantity of information to make sense by bringing out the
links which was not evident or existing. It is therefore necessary to treat information or facts in
order to transform them in to analyzable data. This treatment is usually assisted by a computer
with the help of statistical packages like SPSS, MODALISA, EXCEL, NUMBERS, SHINXS …

During the analysis of data collected from our research, we used the SPSS package in a
systematic manner in order to treat our data. The use of this package was because of its
availability and less cost. Using this package, data collected through our questionnaire were
analyzed as follows:

II.1.2.1 FLAT SORTING (TRI À PLAT) FOR ONE DIMENSIONAL ANALYSIS

Sorting is the calculation of percentage of response from one question after another that
enables the construction of frequency tables. Frequencies are used to indicate how often a
II.1.2.2 THE CROSS SORTING (TRI CROISÉ) FOR BI-DIMENSIONAL ANALYSIS

This is an extension of many variables of flat sorting. Cross sorting is an operation use to
calculate the frequency of statistical individuals that fall under each cell of a Cartesian product of
many variables. This implies cross sorting consist of crossing two modalities or variables. The
result of cross sorting is a contingence table. The choice of crossing two variables and the test to
be carried out between them usually depend on the research question and the hypothesis set.
Considering the fact that our research question and its probable response brings out the
association between pairs of variables, we are going to use the test of SPEARMAN Rank
Correlation coefficient in crossing these variables.
The SPEARMAN Rank correlation coefficient has as purpose to establish whether there
is any form of association between two variables when the variables are arranged in the rank
form. This coefficient is calculated as follows:35

∑[ ( ) − ( ) ]²
=
( − )
With X, Y being the variables to be correlated; n = number of pairs of ranking

This coefficient is usually used when the modalities or variables are in the form of a
measurement scale and to show that there exist correlations between the variables the results of
the correlation have to fall between +1 and -1. We are going to retain a 5% level of significance.
This implies the correlation is going to be significant at α = 5%, α being the error margin
defined.

II.2 CHARACTERISTICS OF POPULATION

Before the presentation of our results obtained from the data analyzed, it is necessary to
bring out characteristics of population from which this data was collected as well as the limits
and delimits we might have faced while collecting our data.

II.2.1 CHARACTERISTICS OF THE MFI AND THE RESPONDENT

The variables used in our questionnaire to identify our sample population are used in the
following tables to bring out the characteristics of the MFIs interrogated and the personnel of the
management whom is the respondent. We identified our unit of population which is the MFIs by
Table 7: Category of Microfinance institution
Cumulative
Frequency Percent Valid Percent
Percent
Category 1 41 89.1 89.1 89.1
Category 2 4 8.8 8.8 97.9
Valid
None response 1 2.1 2.1 100.0
Total 46 100.0 100.0
Source: Output from questionnaire

As concerns the category of MFIs interrogated, we can see that the majority are category
one MFIs with a percentage of 89.1%. This is due to the fact that category one MFIs benefit from
taxation advantages making most MFIs to register under this category even if they do not wish to
operate under the norms of this category. Category two registered 8.8% while just 2.1% of the
questionnaire return without an answer to this question.

Table 8 : Location of the institution in the North West region

Frequency Percent Valid Percent Cumulative Percent
Mezam 8 17.4 17.4 17.4
Momo 8 17.4 17.4 34.8
Boyo 7 15.3 15.3 50.1
Menchum 5 10.9 10.9 61.0
Valid
Ngoketunjia 6 13.0 13.0 74.0
Bui 6 13.0 13.0 87.0
Donga Mantung 6 13.0 13.0 100
Total 46 100 100
Source: Output from questionnaire

From the above table indicating the MFIs in the different divisions in the N.W region, the
highest number of MFIs who participated in our research is in the Mezam and Momo divisions
with a percentage of 17.4%. This is simply because there are around the center Bamenda where
most MFIs are accessible. This division was followed by Boyo with 15.3% simply because of its
plain nature and the good roads present that make accessibility also easy. The least was
Menchum with 10.9% this is due to their bad roads which made accessibility very difficult.

Table 9: Period of creation of the institution

Frequency Percent Valid Percent Cumulative Percent
Before 1980 26 56.6 56.6 56.6
Between 1980-2000 10 21.7 21.7 78.3
Valid
After 2000 10 21.7 21.7 100
Total 46 100 100
Source: Output from questionnaire
during the colonial days and at the early days of independence in order to help poor
Cameroonians. The economic crises which stroke the country in the second half of the 1980s led
to the lower rate of creation represented by 21.7% since investors were unsure of the economy.
After the year 2000, though the economy was a bit stable and the need for more financial
resource arose, the number created was still stable simply because of the risks to which these
MFIs were being exposed to and explained by the frequent closure of one MFI or the other.

Table 10: Nature of members in the microfinance institution

Frequency Percent Valid Percent Cumulative Percent
Individuals 21 45.7 45.7 45.7
Groups 22 47.8 47.8 93.5
Valid
Enterprises 3 6.5 6.5 100.0
Total 46 100 100
Source: Output from questionnaire

47.8% of the MFIs interrogated had mostly groups as their members as shown in the table
above. This is for the simple reason that most MFIs have confident in groups than in individuals
especially when giving out loan. Constituting more groups than individuals as their members,
help to reduce credit risk and other financial risk which might set alongside. Groups represent
confident collateral for granting loans than individuals and enterprises. Nevertheless, since the
N.W region is not very industrious to an extent 45.7% MFIs has individuals as their members
and lastly 6.5% has enterprise as members.

Table 11: Your position in the organization

Frequency Percent Valid Percent Cumulative Percent

CEO 4 8.7 8.7 8.7

Middle level manager 32 69.6 69.6 78.3
Valid Supervisor 5 10.9 10.9 89.1
Any other 5 10.9 10.9 100.0
Total 46 100.0 100.0
Source: Output from questionnaire

The above table presents the position occupied on the board by the various respondents.
We see that the number of CEOs who responded to the questionnaire were just 4 which gave a
response percentage of 8.7%. This low response rate by CEOs is owing to the fact that it was
difficult for the for the researcher to meet with the CEOs of the various institutions. 69.6% of
the respondents were middle managers. This is because many of the institutions visited were
II.2.2 LIMITATIONS AND DELIMITATIONS OF STUDY

II.2.2.1 DELIMITATION ON THE RESEARCH DESIGN

Delimitations imply limitations on the research design that we have deliberately imposed.
Recalling, we earlier said the structure of our research design brings out the logical link between
the research questions (TSAPPI, 1997), the data to be collected and the expected results or
objectives to be attained. Therefore, with the zeal to attain our set research objective which is
bringing out the significant link between an effective corporate governance structure and
financial performance in MFIs, we were tempted because of several reasons to place the
following delimitations to our study.
Firstly, as mentioned in the previous chapters of our work, it is obvious that MFIs are
exposed to a variety of opportunistic behaviors. We are going to limit our study only to the board
composition and to the effective management control. This is explained by the fact that; they are
inherent within the MFI’s internal operations. Furthermore, since the management of
headquarters’ level operations varies significantly from one MFI to another, we limit our topic in
controlling the most common governance practices at the branch level. A corporate governance
approach to internal control aims to mitigate financial profitability (including credit, liquidity,
and interest rate risks) and economic profitability (such as return on equity). Branch level
internal control does not usually address strategic domains, such as overall governance, business
control and external control.

Secondly, looking at the accessible population to which we aimed at collecting our data,
we limit our study only to MFIs in the N.W Region of Cameroon. This limitation was due to the
simple reason that, MFIs originated from this region. The idea of credit union which today
represents one of the most extended networks in micro financing was first introduced in
Njinikom by Rev. Father Anthony Jansen, a catholic priest from Holland in September 1963. In
1965, Father BARNILE an American created the second credit union in Kikaikelahke-Nso. In
1968, there were 13 registered credit unions that held a meeting in Kumbo under the
chairmanship of Father BARNILE to form the West Cameroon Credit Union League (WCCUL)
which nowadays is called CAMCCUL.

II.2.2.2 LIMITATIONS OF SAMPLING DESIGN AND QUESTIONNAIRE

 several difficulties. The study population from which our sample population is chosen is very
distant and considering the time constraint and financial difficulties faced in circulating in the
area, we could only divide the region into strata to facilitate the task. Also, some of the MFIs are
situated in very remote areas in the region which make it more difficult to reach them.

We also face some difficulties with the use of questionnaires as a tool to collect our data.
Generally, difficulties to respond to questions in questionnaires cannot be neglected. The
management of some microfinance institutions deliberately refused to answer the questions and
some even omits some questions making the questionnaire to be invalid. Some respondents
commonly misinterpreted the questions. This practically led to the rejection of several
incomplete questionnaires. Consequently the analysis of the questionnaire is as shown in the
table.

Table 12: Analysis of questionnaire distributed

Division
Mezam Momo Boyo Menchum Ngoketunjia Bui Donga Mantung Total
Element
Questionnaire
8 8 8 8 8 8 8 56
distributed
Questionnaire
8 8 8 7 7 7 8 53
received
Incomplete
0 0 1 2 1 1 2 07
questionnaires
Treatable
8 8 7 5 6 6 6 46
questionnaires
Source: our own construction

Even the inaccessible nature of some MFIs was a limiting factor for our questionnaire
administration. Our results are liable to error, since some respondents refuse to cooperate by
intentionally giving dishonest answers.
Finally, we encountered financial difficulties given that to carry out a research requires
much money rendering it to be very expensive. Responses from the administration of
questionnaire took a lot of time and money since our study area is far from Douala. Time
constraint, due to the charged academic program in FSEGA was also a limiting factor. Getting
information from documentary sources was not also an easy task since libraries do not allow us
to take books out of the Library.
The purpose of this chapter was to present the logical structure of the research design and
the sampling plan, precise the techniques used in analyzing data and the characteristics of the
population from which this data was collected. We as well deem it necessary at the end to bring
 CHAPTER FOUR:
THE EMPIRICAL INCIDENCE OF CORPORATE
GOVERNANCE ON FINANCIAL PERFORMANCE

Chapter three of this work permitted us to apprehend the shape of our retain field of
investigation so as to examine the empirical part of the envisaged problematic. Likewise, the
methods applied in other to collect, process and analyze the necessary primary data was
presented. At this point, the following questions are posed, notably: how can management
control impact long term financial performance in micro-financial institutions located in
Cameroon? To what extent can board composition influence the profitability of financial
institution in Cameroon? What is the place of corporate governance in the formation of financial
sustainability in microfinance sector? What lesson can be drawn? The objective of this chapter is
a tributary to the above questioning. Hence it aim at providing answers to the questions above
taking into consideration the results from our data analysis collected from 46 microfinance
located in the North West Region of Cameroon. Firstly, results from our field enquiry concerning
the member’s appreciation of the governance in their respective microfinance institutions are
presented. Secondly, the empirical link between the dimensions of corporate governance and
financial performance is verified. Finally, feasible managerial implications and recommendation
are formulated from the revelation of the result presented.

SECTION I: APPRAISAL OF CORPORATE GOVERNANCE

AND FINANCIAL PERFORMANCE IN MFIs
The conceptual model adopted within the framework of our research shows the inter-
dependency of our concepts. Notably, financial performance is the independent variable while
management control and board composition are independent variables. In this section, the
results relative to each concept are presented at first followed by the analysis of the capacity of
each concept to influence financial performance.

I.1 PERCEPTION OF CORPORATE GOVERNANCE DIMENSIONS

I.1.1 PERCEPTION OF BOARD COMPOSITION IN CAMEROON MFIs

Twenty items, measured on a Likert scale have been used to empirically apprehend the
perception of board composition in CAMEROON MFIs. The figures and tables below are used
to summarize the results of these findings.

Table 13 : Number of board members (Board size)

Frequency Percent Valid Percent Cumulative Percent
Less than 5 members 9 19.6 19.6 19.6
5 to 10 members 29 63 63 82.6
Valid 10-15 members 4 8.7 8.7 91.3
More than 15 members 4 8.7 8.7 100
Total 46 100 100
Source: Output from questionnaire

From the above presentation, institutions with less than 5 board members had a response
rate of 19.60%, those with board members from 5 to 10 had a response rate of 63% (this means
that most of the MFIs in which research was carried out has as from 5 to 10 board
members).Institutions who has board members from 11 to 15 had a response rate of 8.70% and
those with more than 15 board members had a response rate of 8.70%. Small board size is more
effective. In other words, oversized board of director might lead to worse performance. For
instance, the case of free-rider might appear and reduce board effectiveness. Moreover, financial
market shows positive reaction toward board downsizing announcement.

Table 14 : Board member’s experienced profile

Frequency Percent Valid Percent Cumulative Percent
Entrepreneurship 2 4.3 4.3 4.3
Accounting and financial 30
65.3 65.3 69.6
management
Valid Microfinance experts 7 15.2 15.2 84.8
Human resource
7 15.2 15.2 100
management
Total 46 100 100
Source: Output from questionnaire

The above presentation shows the academic qualification and experience of the board
members. Those with entrepreneurship experience represent a response rate of 4.30%,
respondents with accounting and financial management qualification/experience represents a
response rate of 65.20%. This high rate of response in relation to accounting and financial
15.20% and those with qualification and experience in Human in resource management had a
response rate of 15.20%.

Table 15 : Appraisal of number of women on the board

Frequency Percent Valid Percent Cumulative Percent
Non 11 23.9 23.9 23.9
1 11 23.9 23.9 47.8
2 17 37 37 84.8
Valid
3 4 8.7 8.7 93.5
4 3 6.5 6.5 100
Total 46 100 100
Source: Author from Field data

As to what concerns the presence of women in the board room, the researcher gathered
the following information. The data collected shows that 23.90% of the institutions visited have
no woman in the board room. 23.90% has one woman in the board, 37% have two women in the
board, 8.70% have three women in the board room and 6.50% have four women in the board
room. We realize that most of the MFIs (category one and two) have two women among the
board of directors of their institutions.

I.1.2 PERCEPTION OF MANAGEMENT CONTROL IN CAMEROON MFIs

Fourteen items, measured on a seven point Likert scale have been used to empirically
apprehend the effectiveness of management control in microfinance institutions operating in the
North West Region of Cameroon. The tables below are used to reveal the primary tendency of
control within MFIs.

Figure 03 : Availability of control organs within MFIs

100.00% 93.50%
90.00%
80.00%
67.40%
70.00%
60.00% 54.30%
50.00% 41.30%
40.00% 32.60%
30.00%
20.00%
6.50%
10.00%
0.00%
Audit Committee Remuneration Committee Legal Committee
No Yes
 In relation to the availability of the audit committee, remuneration committee and legal
committee, the researcher found out that 93.50% of MFIs has audit committee and 6.50% does not have,
41.30% has remuneration committee and 54.30% does not have. As to what concerns the legal committee,
67.40% institutions have legal committee and 32.60% does not have legal committee. It was discovered in
the field that most institutions that had remuneration committee were those of category two.

Table 16 : Distribution by the size of the audit committee

Frequency Percent Valid Percent Cumulative Percent
1 member 3 6.5 6.5 6.5
2 members 1 2.2 2.2 8.7
3 members 38 82.6 82.6 91.3
Valid
4 members 3 6.5 6.5 97.8
5 members 1 2.2 2.2 100
Total 46 100 100
Source: Author from Field data

With respect to the number that makes up the audit committee, institutions with two
members of the board committee had 2.20%, institutions with three members of the audit
committee had 82.60% showing that most of the MFIs had an odd number in the audit
committee. Those with 4 members in the audit committee have a response rate of 6.50% and
those with five members have a response rate of 2.20%.

Table 17 : Presence of management information system (MIS) as a control tool

Frequency Percent Valid Percent Cumulative Percent
Fully present 21 45.7 45.7 45.7
Partially present 10 21.7 21.7 67.4
Less present 4 8.7 8.7 76.1
Valid
Indifferent 7 15.2 15.2 91.3
Not present 4 8.7 8.7 100
Total 46 100 100
Source: Author from Field data

From our enquiry made, 67.7% of MFIs has MIS as a control tool in their institution.
This is simply because an internal control cannot effectively take place without a given system of
information put in place, whether computerized or not. Nevertheless, 15.2% of MFIs are still
indifferent meanwhile 8.7% do not have any MIS.
Table 18 : Regularity of updating the manual of procedures
Frequency Percent Valid Percent Cumulative Percent
Very often 4 8.7 8.7 8.7
Often 4 8.7 8.7 17.4
Not often 7 15.2 15.2 32.6
Valid
 Though the manual of procedure is present only 7.8% of MFIs update their manuals very
often and 45.3% of them do not even care to update their manuals according to the changes in
modes of transactions of the evolution of other factors in the institution.

Table 19: Regularity of verification of cash vault

Frequency Percent Valid Percent Cumulative Percent
Very often 17 36.9 36.9 36.9
Often 7 15.2 15.2 52.1
Not often 7 15.2 15.2 67.3
Valid
Rarely 5 10.9 10.9 78.2
Never 10 21.8 21.8 100
Total 46 100 100
Source: Author from Field data

The verification of cash vault which is the base for all liquid assets in MFIs is verified
only by 36.9% of the MFIs very often, 21.8% never even care to verify the cash vault which is
not normal.

I.2 MEASUREMENT OF BOARD COMPETENCE

This segment seeks to verify the competence of the board members in making
appropriate decisions that will propel the MFI into steady growth. In this study three indicators
are used to capture board competence; number of Board of directors with a college degree,
number of Board members with business management experience and finally the number of
board of directors with industry specific experience. This is an important element of board
composition because it evaluates the management capacity of the board.

Table 20: Number of Board member with a college degree

Frequency Percent Valid Percent Cumulative Percent
Two members 9 19.6 19.6 19.6
Three members 10 21.7 21.7 41.3
Four members 5 10.9 10.9 52.2
Valid
Five members 18 39.1 39.1 91.3
Six members 4 8.7 8.7 100
Total 46 100 100
Source: Author from Field data

The table above shows the distribution of microfinance (MFIs) institutions in this study
with respect to number of board of directors with a college degree. The table shows that 39.10 %
degree and above while 10.9% of the sample registers 4 members with a college degree and
above. Only 8.7% of the sample has up to 6 members with a college degree and above. The
verification of the number of board members with a college degree and above permits the
researcher to know the ability of the board to adequately understand financial reports and other
company reports in order to know or better still make appropriate decisions that would help the
institution grow. The table above shows that only 47.8% of the sample has more than 5 board
members with a college degree and above.

Table 21: Board members with business management experience.

Frequency Percent Valid Percent Cumulative Percent
One 4 8.7 8.7 8.7
Two members 13 28.3 28.3 37
Three members 15 32.6 32.6 69.6
Valid Four members 2 4.3 4.3 73.9
Five members 11 23.9 23.9 97.8
Six members 1 2.2 2.2 100
Total 46 100 100
Source: Author from Field data

The table above shows the number of board members with business management
experience, the tables illustrates that 32.6% of the sample have 3 board members with business
management experience and 23.9% with up to 5 members with board management experience.
Only 2.2% of the sample has up to 6 members with board management experience. It is therefore
evident that only 26.1% of the sample has more than 5 members with business management
experience. 28.3% of the sample registers only 2 members with business management experience
while 8.7% of the sample has 1 person on their board with business management experience.

Figure 04: Board of directors with industry specific experience

How many of the board of directors have

industry specific experience?
40.00% 37%

30.00% 23.90% 21.70%

20.00%
8.70% 8.70%
10.00%

0.00%
1 2 3 4 5
 The figure above shows that 37% of the sample has 2 members with industry specific
experience while 8.7% of the sample has only 1 member with industry specific experience. The
figure equally shows that 23.9% of the sample has 3 board members with industry specific
experience while 8.7% of the sample has up to 8.7% of the sample with 4 members having
industry specific industry experience. Only 21.7% of the sample has 5 members with industry
specific experience. From the field study, we discover that many of the MFIs have only two
members with industry specific experience which can be a negative impact to the MFIs sector in
Cameroon.

I.3 THE EFFECTIVENESS OF MANAGEMENT CONTROL

Table 22: Evaluation of the internal control system

Frequency Percent Valid Percent Cumulative Percent
Very often 17 36.9 36.9 36.9
Often 10 21.8 21.8 58.7
Valid
Not often 19 41.3 41.3 100
Total 46 100 100
Source: Author from Field data

The table above shows that, 41.3% of the MFIs interrogated do not often evaluate their
internal control system. However 36.9% evaluate their control system very often.

Table 23: Degree of effectiveness of management control

Frequency Percent Valid Percent Cumulative Percent
Highly effective 20 43.5 43.5 43.5
Averagely effective 11 23.9 23.9 67.4
Valid
Indifferent effective 15 32.6 32.6 100
Total 46 100 100
Source: Author from Field data

Though most of the MFIs that we interrogated have an organized information system,
only 43.5% of them are able to effectively use this system for internal control as shown in the
table below. up to 32.6% of them are indifferent on the usage of the information system for
control.

Table 24: Degree of effectiveness of internal control using mastery of transactions

Frequency Percent Valid Percent Cumulative Percent
Highly effective 17 36.9 36.9 36.9
Averagely effective 18 39.1 39.1 76
 36.9% of MFIs who master their transactions very well are having an averagely effective
internal control. Meanwhile just 8.8% of them are less effective.

This first section was concentrated the analysis of the frequency tables and figures which
gave us the tendency that we commented on by trying to give some reasons. After commenting
on the frequency tables/figures, the next thing is to verify our hypotheses in order to propose
better managerial recommendations to stakeholders in MFIs on how to improve their financial
performance through the observation of a quality corporate governance structure adapted to this
sector of activity.

SECTION II: THE INFLUENCE OF GOVERNANCE ON

FINANCIAL PERFORMANCE IN MFIs

Literature consulted reveals that the dimensions of corporate governance positively

influence institutional financial performance. This theoretical conclusion let us to formulate two
hypotheses. The later have been experimented in the Cameroonian reality of the microfinance
industry. In this section, we will first of all examine the influence of these corporate governance
dimensions on the long term financial sustainability of microfinance institutions in Cameroon
and we shall also present some managerial implication as well as recommendations.

II.1 VERIFICATION OF HYPOTHESES

Our main research objective was to show the significant impact of corporate governance
on the financial performance in MFIs. However, with the aim to attain this set objective, we had
formulated two hypotheses which we are going to use information collected to see if they are
verified. Recalling:

H1: Effective management control positively influence the financial performance of MFIs.

H2: Board composition enhances positively the financial performance of MFIs

The principal focus here is to assess using SPEARMAN correlation coefficient the
relationship between corporate governance dimensions and long term financial sustainability on
II.1.1 SPEARMAN’S CORRELATIONS BETWEEN CONSTRUCTS

In this rubric, the correlation matrix of the constructs are computed which provides
a preliminary evidence of the relationship between the variables. The purpose of
undertaking correlation analysis is to check whether there is multicollinearity problem in the
model and to indicate whether the variables move together or not in the same direction. The
correlation coefficient varies from -1 to +1, a -1 indicating a perfect negative correlation, and +1
indicates perfect positive correlation. If the correlation is 0, the movements of the variables are
said to have no correlation. The correlation coefficient measures the strength of relationship
between two variables. The results of the correlation matrix are presented in Table 25 below.
-.646 .089 .315 .065 .155 -.123 -.093 .368 .245 .174 .117

-.085 -.446** .436** .215 -.096 .203 .121 .006 -.227 .423** .261

-.102 0.000 .377** .126 .000 .541** .365* .360* .174 .652** .731

.380** -.151 .325* -.209 -.171 .271 .039 -.351* -.384** -.041 -.092

.464** -.330* .288 .328* .063 .334* .424** .222 -.332* .137 -.203

1 -.187 .118 .168 .033 .188 .308* -.107 -.095 -.052 -.094

-.187 1 -.253 -.410** .399** -.010 -.152 -.049 .507** .205 .342*

.118 -.253 1 .025 -.156 .345* .336* .131 -.198 .247 .200

.168 -.410** .025 1 .102 -.038 .282 .353* .180 .255 .264

.033 .399** -.156 .102 1 .015 .152 .167 .460** -.042 -.070

.188 -.010 .345* -.038 .015 1 .686** .230 -.037 .556** .603

.308* -.152 .336* .282 .152 .686** 1 .399** .201 .474** .085

-.107 -.049 .131 .353* .167 .230 .399** 1 .399** .338* .029

-.095 .507** -.198 .180 .460** -.037 .201 .399** 1 .166 -.083

-.052 .205 .247 .255 -.042 .556** .474** .338* .166 1 .029
-.094 .342* .200 .264 -.070 .603 .085 .029 -.083 .029 1
 The Spearman’s correlation table above shows the relationship between variables in
the study, from the table above the presence of board members with academic qualification
and experience of board member has a positive impact on financial performance (ROA). This
shows that when board members have academic qualification and experience they have the
ability of making good decisions and therefore they can equally efficiently assess the
management strategy of the management team.
The correlation equally shows that the presence of a woman on the board of directors
have a strong and positive relationship between financial performance and women on the
board. The correlation coefficient 0.652 and 0.731 which shows that it’s a strong relationship
between the presence of women on the board and financial performance this ties with
literature in other parts of the world. This underscores the fact that women bring a special
stamina on the board and most often that eye for details that other board members may leave
pass by.
The correlation table above shows that there is no correlation between audit
committee and financial performance, this relationship is not significant. The table equally
shows that there is no correlation between legal committee, remuneration committee and
financial performance of MFIs.
The correlation table shows that there is a weak positive correlation between the
number of audit committee members and financial performance. This relationship is
significant at 10% level. The table shows a positive and significant relationship between
effective reporting of income to board and financial performance of MFIs, this is imperative
in the MFIs because it permits the board to understand areas that requires redirection of
interests.
Effective reporting of expenditure and investment to the board and financial
performance have a positive and significant relationship. This underlines the importance of
appropriate financial reporting and its influence on board decision making process. This
relationship is statistically significant at 1% level.
Capital management is an important aspect of financial decision making and
corporate strategic action plan. The results underline how important effective reporting of
capital management permits the board to effectively sanction management and propose
solutions for the good of MFIs, this is why there is a positive and significant relationship
 Results of Spearman‘s correlations indicated that all the variables are correlated to
each other at 5% level of significance. Although correlations provides preliminary evidence
of the relationship between two variables, a more sophisticated approach such as multivariate
linear regression is needed to ensure that the effect of other variables are taken into account.

II.1.2 MULTIVARIATE LINEAR REGRESSION ANALYSIS

To investigate the effect of corporate governance on financial performance, the

study follows a two step approach. First, a linear regression is fitted employing the synthetic
indicator of financial performance (return on equity) as a dependent variable and the
principal components of management control (Effective reporting of income to the board,
Effective reporting of expenditure and investment to the board, Report on capital
management, Report on predefined target and excess returns, Audit Committee and Size of
audit committee) as independent variables. The second step consists fitting a
regression financial performance (return on assets) as a dependent variable and board
composition as an independent variable.

II.1.2.1 MANAGEMENT CONTROL AND FINANCIAL PERFORMANCE

The regression result between the principal components of effective management
control dimension and financial performance (return on equity) is presented in the table
below.
Table 26: Regression model of H1
Level at
Dependent variable Parameter Coefficient T Level of Sig.
0.05
Financial Constant 2.382 12.456 0.000 Yes
performance Effective reporting of income to the
(Return on 0.181 3.268 0.001 Yes
equity) board

Effective reporting of expenditure

0.388 3.220 0.002 Yes
and investment to the board

Report on capital management 0.752 9.723 0.000 Yes

Report on predefined target and

0.235 3.049 0.003 Yes
excess returns

Audit Committee 0.135 2.125 0.035 Yes

 In Table 26, the regression results of management control on return on equity are
presented. The findings showed that, the coefficient of all the management control
dimensions are significant at 5% level, suggesting a positive relationship between long
term Financial performance and management control dimensions. Among the management
control dimensions, Report on capital management obtained the highest coefficient (0.752).
This means, a 1% increase in the level of the control relative to capital management may lead
to 75.2% rise in return on equity. Furthermore, a 1% increase in Effective control of
expenditure and investment by the board will lead to 38.8% increase in financial
performance; a unit rise in Report on predefined target and excess returns leads to 23.5%
increase in the level of the firms return on equity. For Effective reporting of income to the
board, the findings indicated that a percentage increase in the variable will lead to
18.1% rise in financial performance. The coefficient of Audit Committee is the 0.135 which
means a 1% increase in Audit Committee control activity will result in 13.5% rise in net
return on equity. Hence, the model summary is presented below:

Table 27: Regression model

Model Summary
Std. Error of the
Model R R Square Adjusted R Square Sig.
Estimate
1 0.732a 0.535 0.522 1.306 0.000a
a. Predictors: (Constant), synthetic indicator management control 1, synthetic indicator management control 2, synthetic
indicator management control 3, synthetic indicator management control 4, synthetic management control quality 5.

The model summary above indicates that 53.5% of variation in the return on equity is
explained by variations in management control synthetic indicators. After analyzing our first
hypothesis, it shows that R Square is positive; therefore the level of management control has
a positive influence on the return on equity and it is better seen in the equation below;

= . + . + . + . + . + . .

II.1.2.2 BOARD COMPOSITION AND FINANCIAL PERFORMANCE

The test of this second hypothesis which shows how board composition can bring
about long term financial sustainability in the Cameroonian context, has led us to bring out
 Table 28: Regression model of H2
Dependent variable Parameter Coefficient T Level of Sig. Level at 0.05
Financial Constant 0.634 0.496 0.024 Yes
performance
(Return on assets) Size of the board 0.721 2.766 0.010 Yes

Number of women on the board 0.471 3.508 0.002 Yes

Remuneration Committee -0.317 -0.671 0.508 No

Legal Committee 0.380 0.881 0.036 Yes

Number of board members with

0.257 2.132 0.042 Yes
college degree

Board of directors with industry

0.174 1.405 0.041 Yes
specific experience

Board of directors with business

0.008 0.080 0.039 Yes
management experience
Source: Output from questionnaire

Model Summary
R Square 0.811

Adjusted R Square 0.746

Sig. 0.0023
Source: Output from questionnaire

The regression result shows that 81.1% of financial performance (return on equity) is
explained by the variables in the study. The global level of significance shows that the model
is globally significant at 1% level. This means that the regression result is globally significant
and thus individual results can effectively be used for policy implications.

Considering the results obtained from our enquiry, we can take a number of stands as
concerns the answer to our main research question. The two hypotheses we just validated
were probable solutions to our research question and therefore imply it has been answered.
Recalling, our main question to this research which was: what is the impact of corporate
governance on the financial performance of MFIs in Cameroon?, we are going to take stands
II.2 MANAGERIAL IMPLICATIONS OF THE STUDY

From the results we analyzed and interpreted above, we can now bring out our own
contribution which can have both theoretical and practical impact. Having confirmed our
second hypotheses through the result of our findings, as well as given a probable answer to
our questions, we are going to some managerial implications of our results and contribution
to the study which can help MFIs to implement and ameliorate their board procedures,
structure and compositions to boost financial performance.

In the first place, we noticed with much desperation from our results that, the financial
performance of microfinance institutions is positively affected by the BOD procedures and
the BOD composition. Our advice in this case to the institution is that; for a healthy
functioning of good governance, they should involve more experts into the board who have
accounting and financial knowledge so that they can be able to interpret the financial
statement perfectly and come up with strategic plans

Secondly, the board and management have as duty to encourage employee

commitment to participate in the internal control process. But contrarily, our results shows
that, only management participates fully in the internal control in most MFIs, meanwhile the
board members are indifferent and contributes in a low rate to the control process. The board
members of MFIs are advice to set an example for the personnel by involving themselves in
the internal control process in the mitigation of risks, especially as risks are an unforeseen
circumstance which can happen at any time and from any source. They don’t plan for
Directors education, since the world is changing rapidly especially in the technological
domain, it is necessary that the board should have plans for the Directors education so as to
advance with the changing economy and be able to set in good strategic planning for the
institution.

In addition, though most MFIs possess manual of procedures, majority of them do not
update these manuals regularly and likewise, tasks some of them partially describe tasks into
these manuals. Our advice in this case to the management is that; for a healthy functioning of
the internal control system tasks should be described fully in manuals of procedure and they
should be updated as often as possible in order to ensure it meets up with changing risk
 Hence, the segregation of duties and job description which is one of the main
principles of internal control should be taken more seriously in most MFIs because we
noticed from our findings that, in most MFIs the manager is the accountant and also performs
the duty of the cashier which leads to more exposure to the risk of fraud and many others.

II.3 MANAGERIAL RECOMMENDATIONS

We have noticed in the course of our findings that the expertise profile of the board
members is just average and so, we are proposing to MFIs to set up an election criteria that
will strictly give the minimum number of board members who are required to have some
specific knowledge especially in Accounting and Finance so as to raise the level of
competence of their BOD as this will project a good image of the institution and will enable
more clients or members to join the institution and the establishment will definitely
experience growth and will be able to sale out their products and services and this will enable
the shareholders return on equity to be high because it will boost up financial performance.

Microfinance institutions should also increase the number of their board committees
so that they can be able to effectively take part in control, education of members and the
sensitization of the general public. This will enable them to be able to fulfill the social role of
MFIs which is to alleviate poverty because many people are suffering in our economy today
because they don’t make use of the availability of these MFIs and their products. The board
should also communicate to members and shareholders how the resources of the institution
have been used and the government should also set out legislative measures that will enable
these institutions to give credits just to SMEs and should hold seminars frequently with the
board chair persons so as to educate them on what to do in other to reach out their services to
the poor.

Many employees may have negative attitudes about internal control from past
experiences with internal auditors whose focus was on identifying problems and assigning
blame. Management can work to overcome negative perceptions by encouraging employee
participation in the internal control system, stressing the benefits of risk mitigation, and
emphasizing solutions to problems rather than placing blame. Operations are transparent
when information is clearly and accurately reported and readily available for all who need it
and control risks before they pose a significant threat to the institution. An effective
management information system (MIS) is one that should focus on a few key indicators for
each level of responsibility and produces accurate, timely and relevant information.
Additionally, the MIS can incorporate early warning flags for management in MFI.

Microfinance establishments can reduce the chance for fraud and errors in operations
if procedures are simple, clear and well communicated to employees and clients. As in
traditional financial institutions, MFIs should develop and maintain manual of procedures
that detail the steps required for each transaction, explain how to handle exceptions and
delineate lines of authority. Manual of procedures can reduce confusion and conflict ensuring
standard application of policies and procedures. To be effective, the manual of procedures
should be clearly written, regularly updated and accessible to all employees.

Nonetheless, MFIs should sanction or penalize employees who intentionally violate

known policies and procedures, linking the severity of the penalty to the offense. To prevent
control violations, some MFIs warn employees of the consequences of their actions by citing
sanctions and penalties for each type of violation. For warnings to be effective, MFIs must be
willing to impose sanctions on their employees and fire employees found guilty of fraud.
However, MFIs should consider the use of positive reinforcement as well as the threat of
negative consequences to encourage good behavior. For example, management could reward
employees who identify potential problems early. Management should be careful in
developing its reward and punishment mechanisms so as to ensure a supportive internal
atmosphere or culture.

Microfinance is still a young industry in Cameroon and Africa. That industry is not as
developed as in Latin America or Asia. The sector suffers from a number of issues that result
from its speedy and unorganized development. The first issue at stake is the operational
inefficiency of most MFIs. That operational inefficiency is mainly due to their small size, fast
growth and lack of expertise of the management team. The second issue is linked to
information asymmetry between MFIs and their customers. Client information is costly to
gather and MFIs are reluctant to share such information when it is obtained, which makes the
industry inefficient especially when competition increases. Although in certain cases there is
a black listing of certain customers especially in the case of the CamCCUL network, that
 This chapter has permitted us from the data analysis (particularly frequency tables and
bar charts), to appreciate the Cameroonian reality of corporate governance in MFIs and the
different dimensions of financial performance. Correlation and multivariate regression
analysis enabled us to apprehend the relationship between the components of corporate
governance and financial performance of MFIs. Hence, it was found that for all the corporate
governance dimensions management control had the highest correlation with financial
performance. From the revelations of our study, some strategic recommendations were
formulated to help stake holders in the sector.

This second part of our work brought out the methodological approach in the
assessment of corporate governance in the microfinance industry where we described our
research design, data analysis plan as well as the characteristics of the population not leaving
out limitation of study. We also made evident the relationship that exists between corporate
governance and financial performance through the presentation of the results of our findings,
the managerial implications of these results and the contribution to study. Viewing all what
has been said and done in this part and especially backed by the results of our findings, we
can draw the conclusion that; microfinance stakeholders can achieve high level of
performance through ameliorating strategic corporate governance dimensions. Therefore, for
a microfinance institution to be sustainable over the long term, it must constantly adopt a
dynamic corporate governance policy.
 GENERAL CONCLUSION

The application of good governance is being increasingly viewed as a valued feature

of a well-run company. Therefore, world economies, especially developing ones (such as
Cameroon), have awakened to recognize the need for good governance, as investors are
hesitant to invest in companies that do not subscribe to good corporate governance principles.
Through review of the various corporate governance theories, it has become evident that the
board of directors is an important component of internal governance that enables
management to successfully achieve objectives and enhance the performance of these
microfinance institutions. Therefore, the board composition was selected as the dominant
form of corporate governance within microfinance institutions on which this study was based.

The aim of this study was to determine the relationship between corporate governance
and financial performance. This was achieved through defining specific board characteristics
of corporate governance (independent variables of board independence, CEO-Chairman
duality, women on board, board size and board composition) and microfinance financial
performance measures (dependent variables of net profit margin, ROE, ROA, share price and
dividend payout).

The literature review revealed that there is currently a lack of an appropriate and
publicly available corporate governance measurement tool in Cameroon. As such, the Delphi
technique was used. This entailed interviewing experts in the field of corporate governance in
order to obtain their views regarding what constitutes the research selected independent
variables. The emergent themes from these interviews guided the measurement of these board
variables and empirical testing was conducted against the selected MFIs financial
performance variables using the 46 microfinance institutions located in the North West region
of Cameroon.

The overall results of this study indicate that the vast majority of board selected
variables relating to corporate governance had a positive relationship with microfinance
financial performance. Of the five dimensions relative to the independent variable selected
 Therefore, the following overall conclusions can be drawn from the test results of this
study: Board independence allows for greater benefits and stronger monitoring provided by
independent non-executive directors (NEDs) in acting in the best interests of the company
and therein maximizing stakeholder value.

Although the women on board are seen as important in ensuring overall board quality,
it is not deemed pertinent in terms of contributing directly to company performance. It could,
however, be seen that the diversity of skills and knowledge that each director possesses,
allows the board to act in the best interests of all its stakeholders. This can be seen as an
indirect contribution to company performance and the long-term sustainability thereof.

The empirical testing indicates that larger boards are better for company performance.
It should, however, be noted that the performance of the board is not merely dependent on its
size but on its overall characteristics (skill, expertise, diversity) and capabilities. The
presence and composition of the board remuneration committee (REMCO) positively
contributes to company performance through providing the required objectivity, transparency
and ethical practices in terms of rewarding executive remuneration in line with company
performance.

The difficulties we encountered during this study were mostly at the level of data
collection. This is very normal since we had to rely on third parties for information, it does
not depend only on us. Apart from the difficulties encountered while collecting our data, we
also had the problem of time management between our class timetable and time for our
research work. This made the whole procedure to be very difficult, tedious and tiring. Despite
these difficulties encountered, here we are at the end of our study from which we have
acquired additional knowledge. Future research in this domain could target the measurement
of corporate governance index in network MFIs and independent MFIs; to see which of MFIs
set up is better governed than the other.

All is well that ends well, it is being said that a future manager has to equilibrate short
term actions and long term objectives in order to be able to anticipate the success of his
company. Therefore, we can say an intense attention should be focused on the modeling of
the internal control system of MFIs in Cameroon. While hoping to study in future intensively
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APPENDICE
 TABLE OF CONTENTS

BRIEF CONTENTS ……………………………………………….........…………………………. i

DEDICATION ……………………………………………………………..……………………… ii
ACKNOWLEDGEMENTS………………………………………………………………………... iii
LIST OF TABLES AND FIGURES……………………………………………………………….. iv
LIST OF ABBREVIATION ………………………………………………………..……………... v
ABSTRACT …………………………………………………………………………..…………… vi
RÉSUMÉ ………………………………………………………………………………...………… vii
GENERAL INTRODUCTION …………………………………………………………………... 01

PART ONE: CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE

AS MARRIED THEORETICAL CONCEPTS ………………………………….. 07

CHAPTER ONE: CORPORATE GOVERNANCE: THE PIN CODE OF

MICRO FINANCIAL INSTITUTIONS IN CAMEROON ………………….. 09

SECTION I: THE NOTION OF CORPORATE GOVERNANCE ………………………………. 09

I.1 SPECIFICATIONS OF CORPORATE GOVERNANCE………………………... 09

I.1.1 DEFINITION OF CORPORATE GOVERNANCE………………………. 09

I.1.2 HISTORICAL OVERVIEW OF CORPORATE GOVERNANCE……… 11

I.1.3 THE CORPORATE GOVERNANCE PROBLEM………………………. 12

I.2 RULES AND IMPORTANCE OF CORPORATE GOVERNANCE …………… 12

I.2.1 PRINCIPLES OF CORPORATE GOVERNANCE………………………. 12

I.2.2 IMPORTANCE OF CORPORATE GOVERNANCE …………………… 13

I.3 CLASSIFICATIONS OF CORPORATE GOVERNANCE……………………… 15

I.3.1 ANGLO-AMERICAN MODEL ……………………….………………… 15

I.3.2 GERMAN-JAPANESE MODEL……………………….………………… 16

SECTION II: THE BIRD EYE VIEW OF MICRO FINANCIAL

 II.1.1 DEFINITION OF MICROFINANCE INSTITUTIONS ………………… 17

II.1.2 ORIGIN AND EVOLUTION OF MFIS IN CAMEROON……………… 18

II.2 MISSIONS AND CATEGORIES OF MFIS IN CAMEROON………………… 19

II.2.1 MISSIONS OF MFIS IN CAMEROON………………………………… 19

II.2.2 CATEGORIZATION OF MFIS IN CAMEROON………………………. 20

II.3 CAMEROON REGULATORY FRAMEWORK FOR MFIs SERVICES ……... 20

II.3.1 SERVICES OFFERED BY MICROFINANCE INSTITUTIONS ………. 21

II.3.2 CAMEROON REGULATORY FRAMEWORK FOR MFIS……………. 22

II.4 SPECIFICITY OF GOVERNANCE AND BEST PRACTICES IN MFIS……... 23

II.4.1 SPECIFICITY OF GOVERNANCE IN MICROFINANCE……………... 23

II.4.1 BEST PRACTICES IN MFIs MANAGEMENT ………………………… 24

CHAPTER TWO: THE RELATIONSHIP BETWEEN CORPORATE

GOVERNANCE AND FINANCIAL PERFORMANCE ……………………. 26

SECTION I: CORPORATE GOVERNANCE: AN ABERRATION……………………………... 26

I.1 ESTABLISHED PERSPECTIVES OF CORPORATE GOVERNANCE ……… 26

I.1.1 AGENCY THEORY ……………………….……………………………… 26

I.1.2 STEWARDSHIP THEORY ……………………….……………………… 28

I.1.3 STAKEHOLDERS THEORY ……………………….……………………. 28

I.1.4 RESOURCE DEPENDENCY THEORY ……………………….………… 29

I.1.5 TRANSACTION COST THEORY ……………………….……………… 30

I.2 MECHANISMS OF CORPORATE GOVERNANCE …………………………... 31

I.2.1 INTERNAL MECHANISMS OF CORPORATE GOVERNANCE……… 31

I.2.2 EXTERNAL MECHANISMS OF CORPORATE GOVERNANCE …….. 33

 I.3.2 CORPORATE GOVERNANCE REGULATION INDEXES……………. 34

SECTION II: THE INCIDENCE OF CORPORATE GOVERNANCE

ON FINANCIAL PERFORMANCE……………………….………………………. 35

II.1 DEFINITION OF FINANCIAL PERFORMANCE ……………………………. 35

II.2 DETERMINANTS OF FINANCIAL PERFORMANCE OF MFIS ……………. 36

II.2.1 MFIS-SPECIFIC DETERMINANTS ……………………….…………… 36

II.2.2 MACROECONOMIC VARIABLE ……………………….……………... 38

II.3 INDICATORS OF FINANCIAL PERFORMANCE……………………………. 39

II.3.1 RETURN ON ASSETS ……………………….………………………….. 39

II.3.2 RETURN ON EQUITY ……………………….…………………………. 40

II.4 THE IMPACT OF CORPORATE GOVERNANCE ON THE

FINANCIAL PERFORMANCE OF MFIs……………………….……………… 40

PART TWO: THE IMPACT OF CORPORATE GOVERNANCE ON THE

FINANCIAL PERFORMANCE OF MFIs IN NORTH WEST REGION…….. 43

CHAPTER THREE: METHODOLOGICAL APPROACH IN THE APPRAISAL

OF CORPORATE GOVERNANCE IN MFIs…………………………….. 45

SECTION I: DESCRIPTION OF RESEARCH DESIGN……………………….………………... 45

I.1 LOGICAL STRUCTURE OF RESEARCH DESIGN…………………………… 45

I.1.1 THE STRUCTURE OF RESEARCH DESIGN…………………………… 45

I.1.2 IDENTIFICATION OF CONCEPTS……………………………………… 47

I.2 OPERATIONALIZATION OF CONCEPTS AND MODEL……………………. 49

I.2.1 OPERATIONALISATION OF CONCEPTS……………………………… 49

I.2.2 SIMPLIFIED RESEARCH MODEL……………………….……………... 50

I.3 INSTRUMENT OF DATA COLLECTION AND SAMPLING PLAN…………. 50

I.3.1 THE CHOICE OF INSTRUMENT OF DATA COLLECTION ………….. 50

SECTION II: DATA ANALYSIS PLAN AND CHARACTERISTICS
OF TARGET POPULATION……………………….……………………………… 54

II.1 TECHNIQUES OF ANALYSING DATA ADOPTED ………………………… 54

II.1.1 DATA ANALYSIS AND THE DESIGN OF STUDY…………………... 54
II.1.2 STATISTICAL TECHNIQUES RETAINED……………………………. 55
II.2 CHARACTERISTICS OF POPULATION……………………….……………...
56

II.2.1 CHARACTERISTICS OF THE RESPONDENT………………………… 56

II.2.2 LIMITATIONS AND DELIMITATIONS OF STUDY………………….. 59

CHAPTER FOUR: THE EMPIRICAL INCIDENCE OF CORPORATE

GOVERNANCE ON FINANCIAL PERFORMANCE……………………... 61

SECTION I: APPRAISAL OF CORPORATE GOVERNANCE AND

FINANCIAL PERFORMANCE IN MFIs……………………….…………………. 61

I.1 PERCEPTION OF CORPORATE GOVERNANCE DIMENSIONS……………. 61

I.1.1 PERCEPTION OF BOARD COMPOSITION IN MFIS …………………. 62

I.1.2 PERCEPTION OF MANAGEMENT CONTROL IN MFIS ……………... 63

I.2 MEASUREMENT OF BOARD COMPETENCE ……………………….………. 65

I.3 THE EFFECTIVENESS OF MANAGEMENT CONTROL …………………… 67

SECTION II: THE INFLUENCE OF GOVERNANCE ON

FINANCIAL PERFORMANCE IN MFIS……………………….………………... 68
II.1 VERIFICATION OF HYPOTHESES……………………….…………………... 68
II.1.1 SPEARMAN’S CORRELATIONS ……………………….……………... 69
II.1.2 MULTIVARIATE LINEAR REGRESSION …………………………….. 72
II.2 MANAGERIAL IMPLICATIONS OF THE STUDY……………………….. 75
II.3 MANAGERIAL RECOMMENDATIONS……………………….…………... 76

GENERAL CONCLUSION ………………………………………………………….…………... 79

BIBLIOGRAPHY …………………………..…………………………………………………...... 81