ADDIS ABABA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

SCHOOL OF COMMERCE

Effect of Corporate Governance on Financial

Performance of Microfinance Institutions in Ethiopia

A Research Project Submitted to

Office of Graduate Studies in Partial fulfillment of the requirement for

Degree of Masters in Business Leadership

By: Berhanu Urgessa

Advisor: Adane Atara (PhD)

March, 2021

Addis Ababa

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 STATEMENT OF THE AUTHOR

I declare that this research project is my authentic work and that all sources of materials used
have been properly acknowledged. It has been submitted in Partial fulfillment of the requirement
for Degree of Masters in Business Leadership in Addis Ababa University, School of Commerce.
The author declares that this research is not submitted to any other institution for the award of
any academic degree, diploma, or certificate.

Name: Berhanu Urgessa Signature: _________________

Place: Addis Ababa University

Date of submission: March 2021

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 STATEMENT OF CERTIFICATION

This is to certify that this research project, prepared by Berhanu Urgessa, entitled “Effect of
Corporate Governance on Microfinance Institutions Financial Performance in Ethiopia”
submitted in Partial fulfillment of the requirement for Degree of Masters in Business Leadership
complies with the regulations of the university and meets the accepted standards with respect to
originality and quality.

Signed by the examining committee:

______________________ _______________________ _________________

Name of Chairman Signature Date

______________________ _______________________ _________________

Name of Internal Examiner Signature Date

______________________ _______________________ _________________

Name of External Examiner Signature Date

______________________ _______________________ _________________

Name of Advisor Signature Date

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 ACKNOWLEDGEMENTS

I am deeply grateful to Dr. Adane Atara, my advisor, not only for his guidance and valuable
comments starting from the research project concept note up to the final research write up, but
also for his fast responses to my requests and helped me to finalize with in the time schedule. He
still deserves special thanks for the moral he provided to me that will be energy for my next
career path.

It is my pleasure to extend my thanks to Mrs. Marishet Abdeta, my wife, for her encouragement
and support during this research project work and at every stage of the study. I am great full to
my co-workers, employees and managements of Association of Ethiopian Microfinance,
National Banks of Ethiopia and microfinance institutions without whose cooperation this project
would not have been possible.

Finally, I would like to acknowledge all my friends, individuals and organizations that directly or
indirectly contributed to the successful completion of this study.

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 Abstracts

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

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

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 Table of Contents
Contents page
ACKNOWLEDGEMENTS ............................................................................................................. i
Abstracts ......................................................................................................................................... ii
List of Table .................................................................................................................................... v
List of acronyms …………………………………………………………………………………………………………….………………….vi

CHAPTER ONE ............................................................................................................................. 1

INTRODUCTION .......................................................................................................................... 1
1.1 Background of the Study ....................................................................................................... 1
1.2 Statement of the problem ...................................................................................................... 2
1.3 Objective of the Study ........................................................................................................... 4
1.4 Basic Research Questions ..................................................................................................... 4
1.5 Definition of Terms ............................................................................................................... 4
1.5.1 Conceptual definition ..................................................................................................... 4
1.5.2 Operational definition ..................................................................................................... 5
1.6 Significance of the study ....................................................................................................... 5
1.7 Scope of the study ................................................................................................................. 5
1.8 Limitations of the study......................................................................................................... 5
1.9 Organization of the Study ..................................................................................................... 6
CHAPTER TWO ............................................................................................................................ 7
REVIEW OF RELATED LITERATURE ...................................................................................... 7
2.1 Theoretical Literature Review ............................................................................................... 7
2.1.1 Concept of Microfinance ................................................................................................ 7
2.1.2 Concept of Corporate Governance ............................................................................... 10
2.1.3 Microfinance and Corporate governance ..................................................................... 11
2.1.4 Concept of MFIs‟ Performance Measurement ............................................................. 13
2.2 Empirical Literature Review ............................................................................................... 14
2.2.1 Corporate Governance and Performance of MFIs ........................................................ 14
2.2.2 Impact of Corporate Governance on Performance of MFIs in Ethiopia ...................... 16
2.2.3 Impact of Corporate Governance on Performance of others Firms in Ethiopia ........... 17

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 2.3 Conceptual Framework ....................................................................................................... 19
CHAPTER THREE ...................................................................................................................... 20
RESEARCH METHODOLOGY.................................................................................................. 20
3.1 Research Approach ........................................................................................................ 20
3.2 Research Design .................................................................................................................. 20
3.3 Population and Sampling .................................................................................................... 20
3.3.1 Target Population ......................................................................................................... 20
3.3.2. Sampling Frame ........................................................................................................... 20
3.3.3. Sample Size ................................................................................................................. 21
3.4. Types and Sources of Data ................................................................................................. 21
3.5 Validity and Reliability ....................................................................................................... 21
3.6 Research Ethics ................................................................................................................... 21
3.7 Data analysis and Model Specification ............................................................................... 21
3.8 Description of Variables...................................................................................................... 23
CHAPTER FOUR ......................................................................................................................... 25
RESULTS AND DISCUSSION ................................................................................................... 25
4.1 Descriptive Statistics Result ................................................................................................ 25
4.2 Correlation Analysis ............................................................................................................ 28
4.3 Regression Analysis ............................................................................................................ 29
CHAPTER FIVE .......................................................................................................................... 33
SUMMARY, CONCLUSIONS AND IMPLICATIONS ............................................................. 33
5.1 Summary and Conclusion ................................................................................................... 33
5.2 Implications ......................................................................................................................... 35
6. LIST OF REFERENCES .......................................................................................................... 36
7. APPENDICES .......................................................................................................................... 40
Appendix 1: Questionnaire........................................................................................................ 40
Appendex 2: Multicollineratiy test (VIF).................................................................................. 45

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 List of Tables
Page

Table1. Board size, boards‟ education, numeration and ROA of sampled MFIs ……… 32
Table 2. Sub-committees established in sampled MFIs………………………………. 33

Table 3. CEO educational qualifications……………………………………………… 33

Table 4. CEO industry experience……………………………………………………… 33

Table5. MFI classification by scale…………………………………………………… 34

Table 6: Correlation coefficient……………………………………………………….. 35

Table7: Fixed effect regression result…………………………………………………. 36

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 LIST OF ACRONYMS AND ABBREVIATIONS

AEMFI Association of Ethiopian Microfinance Institutions

BoD Boards of Directors
CEO Chief Executive Officer
CG Corporate Governance
ETB Ethiopian Birr
FDRE Federal democratic Republic of Ethiopia
MFI Micro Finance Institution
NBE National Bank of Ethiopia
NGO Non-government Organization
ROA Return on Asset
SPSS Statistical Packages for Social Science
VIF Variable Inflated Factor

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 CHAPTER ONE

INTRODUCTION
This chapter deals with the overall nature of research work. It consists of background of the
study, statement of the problem, objective of the study, basic research questions, definition of
terms, significance of the study, scope of the study and limitation of the study.

1.1 Background of the Study

Governance is a process by which a board of directors, through management, guides an
institution in fulfilling its corporate mission and protects the institution‟s resource over time.
Fundamental to good governance is the ability of individual directors to work in partnership to
balance strategic and operational responsibilities. Effective governance occurs when a board
provides proper guidance to management regarding the strategic direction for the institution, and
oversees management‟s efforts to move in this direction. The interplay between board and
management centers on this relationship between strategy and operation, both of which are
essential for the successful evolution of the institution (Rachel et al, 1998). Corporate
governance has become a popular discussion topic in developed and developing countries.
The widely held view that corporate governance determines firm performance and protects the
interests of shareholders has led to increasing global attention (Eyob, 2016).

In Microfinance Institutions (MFIs) industry, governance has assumed increasing importance for
several reasons. According to Helms (2006) governance is about achieving corporate goals.
MFIs have double bottle-lines. The first one is meeting social mission that is increasing outreach
and providing finance services to large numbers of low income members of the society, and the
second one is commercial mission to provide those services in sustainable manner. Ensuring
these missions requires proper governance. According to Mersland & Strom, (2007) good
corporate governance is deemed instrumental in strengthening sustainability of MFIs as well as
increasing outreach.

The Federal Democratic Republic of Ethiopia‟s (FDRE) Proclamation No. 40/1996 was the
first regulatory framework for microfinance business in Ethiopia. In the Proclamation,

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microfinance business is defined as “an activity of extending credit, in cash or in kind,
to peasant farmers or urban small entrepreneurs”. This proclamation was replaced by another
proclamation cited as the “Micro-Financing Business Proclamation No. 626/2009”, which came
into force from May 2009. According to the new proclamation, purpose of MFIs shall be to
collect deposits and extend credit to rural and urban farmers and people engaged in other
similar activities as well as micro and small scale rural and urban entrepreneurs (FDRE
proclamation No. 40/1996 and FDRE proclamation No. 626/2009).

Ethiopian legal framework recognizes the hybrid nature of MFIs. In one hand, MFIs are formed
just like any commercial banks as profit making private company subject to commercial law.
And in the other hand, the MFIs are allowed to solicit and receive grants to run its business, and
exempted from profit tax unless dividend is distributed to shareholders (NBE 2019).

Based on the nature of promoter and major shareholding, MFIs in Ethiopia has categorized in to
three such as those owned by regional government, by NGOs and by private shareholders. The
nature of the promoters has implication on the balance between social objectives and commercial
objective (ibid).

1.2 Statement of the problem

The main challenge of MFIs remains their survival, and to meet this challenge, MFIs need to be
competitive. The poor performance of MFIs is usually attributed to their decision-making and
operational processes. The governance of MFIs is therefore identified as one of their main risks.
Despite this, governance is still little explored in these institutions and empirical studies find a
weak relationship between classical governance mechanisms and MFI performance, especially
for the MFIs situated in Africa (Thrikawala et al., 2013a) as cited by Léopold D et al (2017).

In Ethiopia the provision of microfinance service has been carried out by donor funds until the
first licensing and supervision of microfinance business was issued in 1996. This practice had
weakened the development of commercialization of microfinance services (Belete 2015).

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The current regulatory framework requires microfinance institutions to be formed as share
companies (Microfinance business proclamation NO. 626/2009). However, the microfinance
sector in Ethiopia is not yet proved to be a profitable business that attracts commercial investors
rather than social investors. As a result, most of the shareholders of the MFIs are regional
governments, associations and NGO's.

Yet these microfinance institutions have made remarkable progress over the past decades, in
providing financial services for poor households (Ahma, 2012) as cited in (Asefa, 2014)

At moment, however, commercialization of microfinance with the argument of profit motive to

be self-sustainable and addressing social mission would be the main area of concern. To this end,
though some Ethiopian MFIs have proven to have self-sustainable position while pursuing the
social objective, self-sustainability of some MFls seem to be doubtful as they are still dependent
on irregular donor or government subsidies though assumed to have the same operating
environment such as legal, regulatory and macroeconomic environments. Besides, the flow of
private investors to the sector is very limited (Asefa, 2014).

National bank of Ethiopia (NBE) directive incorporates provisions relevant to the governance of
microfinance institution. The directive put a minimum requirement for persons with significant
influence in Microfinance Institution what the directive calls fit and proper criteria. The fit and
proper criteria include education, experience and age of Board of Directors (BODs) and
Chief Executive Officer (CEO) (NBE directive number MFI/21/2012).

Although there are few studies conducted on the effect of corporate governance performance of
microfinance in Ethiopia, they have gaps in address all relevant corporate governance variables
and lacks consistence in in its findings. For instance, Eyob (2016) found that board size has
negative and significant relationship with financial performance of MFIs in Ethiopia whereas
Belete (2015) had the opposite. Besides, NBE (2020) have issued directive that allow MFIs to
transform to banks, that give MFIs an opportunity to move to the trajectory of full
commercialization and at the same time providing microfinance services. This indicates that
commercialization is currently big concern of MFIs in Ethiopia.

Thus, this research project was intended to identify the effect of corporate governance on
financial performance of MFIs in Ethiopia.

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1.3 Objective of the Study

The general objective of the study was to assess the effect of corporate governance on financial
performance of MFIs in Ethiopia. Specific objectives were:

1. To assess financial performance level of selected MFIs in Ethiopia

2. To examine the corporate governance mechanisms in MFIs
3. To identify the effect of corporate governance practices such as board size, board
subcommittee, board numeration, board competence and CEO competence on financial
performance of MFIs
4. To suggest appropriate corporate governance mechanisms to improve performance level
of MFIs

1.4 Basic Research Questions

1. What is the financial performance level of selected MFIs in Ethiopia looks like?
2. Do MFIs in Ethiopia are exercising effective corporate governance?
3. What is the effect of corporate governance practices on financial performance (measured
in profitability) of MFIs?

1.5 Definition of Terms

1.5.1 Conceptual definition

Commercialization of microfinance is defined as the movement of microfinance out of the

heavily donor-dependent arena of subsidized operations into one in which microfinance
institutions 'manage on a business basis' as part of the regulated financial system (Christen and
Drake 2002).

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1.5.2 Operational definition

As indicated in literatures financial performance of MFIs can be measured by number

standardized indicators, but financial performance in this study refers only profitability in terms
of return on asset.

1.6 Significance of the study

As explained above, demand for commercial orientation of microfinance institutions is highly

increasing in Ethiopia recently. This study is, therefore, provide practical information on
effective of corporate governance on performance level of MFIs for players in the industry,
regulatory body and stakeholders working to promote the sub-sector. It is expected to stimulate
interest of practitioners to exercise effective corporate governance mechanisms for better
financial performance of their MFI.

It is also believed to bring an insight on how corporate governance mechanisms can influence
performance level of MFIs in Ethiopia context, which is not addressed very well so far.

1.7 Scope of the study

Population of the study will be registered members of Association Ethiopian Microfinance

Institutions. Due time constraint, only three years data of 25 MFIs was considered in the study.
Profitability in terms of adjusted return on asset was taken as financial performance indicator of
MFIs.

1.8 Limitations of the study

The study took only return on asset as financial performance indicator of microfinance
institutions. It ignores other indicators of finance performance measurement that may affect the
result in some extents.

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1.9 Organization of the Study

The study is organized in to five chapters. The first chapter is introduction that covers the
background of the study, statement of the problem, objectives of the study, the research
questions, and definition of terms, significance of the study, scope of the study and limitation of
the study. In the second chapter literatures review is covered. The third chapter present the
research methodology used in the study. In the fourth chapter, results and discussion is provided.
The final chapter is summary of the findings, conclusions and implications.

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 CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 Theoretical Literature Review

2.1.1 Concept of Microfinance

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 conventional commercial
banks (Rock et al., 1998). According to Robinson (2001) Microfinance is financial services
primarily credit and savings provided to people who engaged in small scale enterprises. It was
first declared as a way to unleash the productive capacities of poor people dependent on self-
employment (Hulme and Mosley 1996). According to Yunus (2016), microfinance would
transform customers‟ businesses by providing capital; that would increase borrowers‟ earnings
and ultimately eliminate poverty. Microfinance has been feted for introducing innovations in
credit contracts, particularly group lending and installment-lending. More broadly, microfinance
demonstrates a new mode of development intervention, one that displaces governments as
central actors and turns to market-mechanisms to deliver services through a range of institutions
that integrate social and financial goals (Cull and Morduch 2017).

Importance of microfinance has been recognized worldwide not only as a tool to fight poverty
but also to insure peace when Mohammed Yunus, founder of Grameen Bank in Bangladish, was
granted Nobel Prize in October 2006. “Lasting peace cannot be achieved unless large population
groups find ways in which to break out of poverty. Microfinance is one such means.
Development from below also serves to advance democracy and human rights”, were the words
to announce the Prize (Leila Mokkadem 2009).

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Key Principles of Microfinance

Poor people need a variety of financial services, not just loans: Microfinance is not limited to
Microcredit. Like everyone else, the poor need a range of financial services that are
convenient, flexible, and affordable. Depending on circumstances, they want not only
loans, but also savings, insurance, and cash transfer services.

Microfinance is a powerful instrument against poverty: Access to sustainable financial

services enables the poor to increase incomes, build assets, and reduce their vulnerability to
external shocks. Microfinance allows poor households to move from everyday survival to
planning for the future, investing in better nutrition, improved living conditions, and children„s
health and education.

Financial sustainability is necessary to reach significant numbers of poor people:

Sustainability is the ability of a microfinance provider to cover all of its costs. It allows the
continued operation of the microfinance provider and the ongoing provision of financial services
to the poor. Achieving financial sustainability means reducing transaction costs, offering better
products and services that meet client needs, and finding new ways to reach the unbanked poor.

Microfinance is about building permanent local financial institutions: The institutions

should be able to mobilize and recycle domestic savings, extend credit, and provide a range of
services. Dependence on funding from donors and governments including government-financed
development banks will gradually diminish. These institutions need to attract domestic savings,
recycle those savings into loans, and provide other services. Microfinance should not be
limited to NGOs or credit unions, let alone projects. Institutions should aim at commercial
sustainability, offering products based on sound market research, rather than relying upon
subsidies and government support. Banking for the poor does not mean poor banking.

Microfinance institutions should be able to charge interest rates that cover their
costs: It costs much more to make many small loans than a few large loans. Unless
micro lenders can charge interest rates that are well above average bank loan rates, they
cannot cover their costs. Their growth will be limited by the scarce and uncertain supply soft
money from donors or governments. At the same time, a micro lender should not use high
interest rates to make borrowers cover the cost of its own inefficiency.

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Microcredit is not always the answer: Microcredit is not the best tool for everyone or
every situation. Destitute and hungry people with no income or means of repayment need other
kinds of support before they can make good use of loans. In many cases, other tools will
alleviate poverty better for instance, small grants, employment and training programs,
or infrastructure improvements. Where possible, such services should be coupled with building
savings.

The role of government is to enable financial services, not to provide them directly:
National governments should set policies that stimulate financial services for poor people at the
same time as protecting deposits. Governments need to maintain macroeconomic stability,
avoid interest rate caps, and refrain from distorting markets with subsidized, high-default
loan programs that cannot be sustained. They should also clamp down on corruption and
improve the environment for micro-businesses, including access to markets and infrastructure. In
special cases where other funds are unavailable, government funding may be warranted for
sound and independent microfinance institutions.

Microfinance works best when it measures and discloses its Performance: Financial
information: such as interest rates, loan repayment, and cost recovery. Social information such as
number of clients reached and their poverty level. Donors, investors, banking supervisors, and
customers need this information to judge their cost, risk, and return (ibid).

The industry is currently growing rapidly and how they are governed therefore matters
(Kyereboah-Coleman & Biekpe, 2005). Stakeholders in the industry have recognized that good
governance is an important element in the success of the MFIs (Campion, 1998); (Rock, 1998) as
cited by Chenuos et al (2014).

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2.1.2 Concept of Corporate Governance

According to agency theory, conflict of interest between agent (manager) and principal
(shareholders) could be reduced through good corporate governance. The theory argue that 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,
which possible through good corporate practices (Habbash 2010).

Fama & Jensen (1983) as cited by (Habbash 2010) argue that shareholders monitor and control
managers through their representatives such as board of directors. Boards of directors are
considered as an important device to protect shareholders from being exploited by managers and
help to effectively control managers when they try to maximize their self-interest at the expense
of the company‟s profitability and as consequence good corporate governance mechanisms
enhance profitability. Thus, according to this argument, corporate governance mechanisms are
designed to align the interest of owners and managers, constrained the opportunistic behaviors of
managers and protect shareholder interests, generally to solve agency problem.

Stockholders theory in the other hand extends the narrow focus of agency theory on
shareholders‟ interest to stakeholders to take into account the interests of many different groups
and individuals, including interest groups related to social and ethical considerations. According
to this theory good corporate governance helps to maximize the mutual interest of all
stockholders. Moreover, corporate governance enables the firm to consider about all
stockholders such as the customers, employee, shareholders, social and can create a stable
environment for sustainable development (Habbash 2010).

Resource dependency theory also explained the importance of corporate governance. According
to resource dependency theory, the role of board of directors is related to providing access to
resources needed by the firm. The theory explained that the primary function of the board of
directors is to provide resources to the firm and directors are viewed as an important resource to

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the firm. Directors bring resources to the firm, such as information, skills, business expertise,
access to key constituents such as suppliers, buyers, public policy makers, social groups as well
as legitimacy. 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 (Abdullah and Valentine 2009) as cited by (Eyob 2016). Recently economists and
management scholars tend to assign to boards the dual role of monitors and advisers of
management. The composition of corporate boards is crucial to providing information for
monitoring and counseling and to ensuring effective decision-making (Ferreira 2010).

According to Hilb (2008) corporate governance is a system by which companies are strategically
directed, interactively managed and holistically controlled in an entrepreneurial and ethical way
and in a manner appropriate to each particular context.

Hussien (2012) has also defined corporate governance as all issues related to ownership and
control of the corporate property, the rights of shareholders and management, powers and
responsibilities of the Board of Directors, disclosure and transparency of corporate information,
the protection of interests of stakeholders that are not shareholders and enforcement of rights.
According to this definition, corporate governance systems depend upon a set of institutions such
as laws, regulations, contract enforcement and norms that create self-governing firms as the
central element of a competitive market economy.

2.1.3 Microfinance and Corporate governance

In the microfinance field, governance has assumed increasing importance for several reasons.
First, as MFIs grow in their outreach, the size of their assets, as reflected in their portfolio, also
grows to considerable size. Ensuring effective management of this growth requires added input
and involvement by a board. Additionally, increasing numbers of MFIs are becoming regulated
and assuming the responsibilities and challenges of a regulated entity. Capturing deposits from
savers and investors is perhaps their most important challenge and requires the greatest
oversight. Finally, MFIs are operating in increasingly competitive markets, and maintaining or
increasing market share has become an important component of their strategic objective (Rachel
et al 1989).

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According to Rachel et al (1989), in microfinance field governance issues pertinent to its
operations are the dual mission of MFIs, ownership of MFIs, the fiduciary responsibility of the
board, and Risk assessment in MFIs.

A dual Mission: it implies balancing between social impact and financial objectives. As stated,
MFIs originated, in most cases, with a dual mission that combines social and financial
objectives. The social mission seeks to provide financial services to as many of the lowest
income population as possible; the financial objective drives the organization to achieve financial
self-sufficiency, which permits sustained service delivery without dependence on subsidies.
MFIs face the difficult task of balancing social and financial objectives: reaching large numbers
of low-income micro entrepreneurs while generating profits. In this context, the boards play a
key role in ensuring that the MFI responds adequately to both objectives (Rachel et al (1989).

Ownership of MFIs: The board of directors either consists of owners or represents the interests
of owners. Aligning the interests of individual directors with the interests of the institution is key
to realizing effective governance. Creating this alignment depends on understanding the issues
associated with each of the four corporate structures of MFI such as public, nonprofit and for-
profit. The specific corporate structure alone, however, does not in itself define effective
governance (ibid).

Fiduciary Responsibility of MFIs: In general, the fiduciary responsibility of the board of any
financial intermediary is considered greater than that required for other corporate entities.
Protecting financial institutions and hence the financial system is a high priority for
governments. Without solvent financial institutions, business, commerce, and the economy
would become dysfunctional. Liquidity is essential for the deployment of a financial institution‟s
product: money. Moreover, because of their high leverage ratio and impact on the payments
system, financial institutions require more stringent internal controls, and more prudent external
supervision and regulation, than do non-financial entities (ibid).

Risk assessment in MFIs: Providing financial services in general carries a set of risks that the
board of directors must be able to assess in its role as corporate fiduciary (ibid).

In literature several variables relating to governance in microfinance are suggested. These

include the structure of ownership, the characteristics of the board of directors and external

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governance mechanisms. The question of ownership is closely linked to that of governance
(Rock et al., 2001) as cited by Léopold D et al (2017). Many MFIs across the world operate as
non-profit institutions (NGOs, associations, cooperatives or mutual benefit companies). As
explained by the authors, In the case of NGOs, there is no owner of the capital. Their financial
resources are granted by investors in the form of subsidies or concessional loans. In associations,
cooperatives and mutual benefit companies, the owners are the members.

On the contrary, in profit-seeking MFIs, investors provide the capital. For efficient governance,
Jensen (1993) suggests, among others, the holding of a significant number of shares by the
managers and the members of the board of directors so that a certain convergence of interests
with the shareholders would exist. This would allow their ownership structure to be clarified to
set up an efficient governance mechanism that is expected to stimulate performance (ibid).

2.1.4 Concept of MFIs’ Performance Measurement

There are two theories related to the analysis of performance of Microfinance Institutions. They
are the welfarist theory and financial approach theory (Gustave 2012).

The welfarist theory: According to this theory, a microfinance institution is regarded to be

performing well when it is able to reach the greatest number of the poor people and provides
them with financial services at a low cost and measured by variables such as outreach and
impact.

Financial approach theory: This second theory is an approach characterized by the will to
liberalize financial markets. It completes with the first one by arguing that in order to evaluate
performance of Microfinance Institutions, one has to combine the two theories using variables
such as outreach and sustainability. According to this theory, a Microfinance Institution performs
well whenever it bases itself on either financial outreach or financial sustainability. It consider
financial variables to decide whether or not a Microfinance Institution is performing well
(Worldbank, 1989) as cited by Gustave (2012).

According to Meyer (2002), there are two kind of sustainability we could observe in assessing
MFIs performance: Loan recovery and profitability. According to this author, outreach and
financial performance are complimentary; this is because as the number of client increases MFIs
enjoy economies of scale and hence reduce costs which help them to financial performance.

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2.2 Empirical Literature Review

2.2.1 Corporate Governance and Performance of MFIs

There have been researches conducted to examine the effect of corporate governance on
performance of MFIs various countries.

Study was conducted by Chenuos et al (2014) to investigate the effect of corporate governance
on Kenyan Microfinance institutions financial sustainability on ten MFIs taking data for the
period of eleven years. The researchers were used explanatory research design and panel data
analysis method to establish the causal effect relationship between corporate governance
variables and the financial sustainability of the MFIs in Kenya. The study found that corporate
governance characteristics such as CEO duality, board size, board composition and CEO gender
have significant effect on financial sustainability of MFIs in Kenya.

Van Dang et al (2020) have also analyzed the relationship between corporate governance and
financial performance of MFIs in Vietnam. The data was collected and involves 100 MFIs from
Vietnam of three years from 2016 to 2018. The researchers constructed a firm-level index of
corporate governance based on aspects of leadership and ownership structure. The study
incorporated board size; board diversity with respect to gender, financial expertise, and local
residency; CEO/chairman duality; female CEO; and shareholding ownership type. The authors
examined the relationship between the governance index and measures of financial performance
such as return on asset, return on equity, and operational self-sufficiency. A two-stage least
squares estimation approaches was adopted with instrumental variables. Finally the researchers
conclude that profitability and sustainability of MFIs improve with good governance practices
and conversely that more profitable and sustainable MFIs have better governance systems.

Gustave (2012) has also conducted the impact of corporate governance on performances of MFIs
in Rwanda. The researcher considered some of its components such as board size, board
composition, non-CEO duality and the supervision of MFIs to assess the performance of MFIs.
Using descriptive statistics like correlation calculations the relationship between corporate
governance and performance of MFIs in was found. The researcher concluded that some

14 | P a g e
components of corporate governance have a correlation with the performance of MFIs in
Rwanda and others have no correlation with the performance of MFIs. According to the
researcher, the correlation of board size, board composition, supervision of MFIs with
performance of MFIs was mixed. Unlike this, the researcher found that there is correlation
between the non-CEO duality and the performance of MFIs in Rwanda.

Mersland (2007) has also conducted study to trace the relationship between performance and
corporate governance in MFIs. The researcher used the panel data structure to take repeated
observations on the dependent performance variables for up to four consecutive years, while the
independent governance variables that were reported only once and thus assumed constant
during the whole period. The relationship was estimated by random effects method, which
allows the inclusion of all years. The study identified the effect of board characteristics,
ownership type, competition and regulation on the MFI‟s financial performance and its outreach.
The researcher indicated that split roles of CEO and chairman, a female CEO, and competition
are important explanations. Larger board size decreases the average loan size while individual
guaranteed loan increases it. No difference between nonprofit organizations and shareholder
firms in financial performance and outreach was found the researcher.

Léopold D et al (2017) examined whether the effect of governance mechanisms on the

performance of MFIs differs according to their legal status in the Cameroonian context.

The researchers based their study on the current micro-finance governance literature and on data
collected by a questionnaire administered to a sample of 137 of one year data of Cameroonian
MFIs. After the analysis, the researchers found two main results. Firstly, at the global level, very
few mechanisms of governance had a significant effect on the performance of the MFIs.
Secondly, a comparative analysis showed that the implementation of differentiated governance
mechanisms according to the legal status of the MFI (cooperative and mutual benefit companies,
nonprofit NGOs, and private companies and profit-seeking NGOs) improves their performance.
They conclude that the mechanisms that affect performance are relatively different according to
the category of MFI. they further concluded base on the result that the result consolidate the
idea that the analysis of the impact of the mechanisms of governance on the performance of
MFIs requires not only an approach that is specific to the sector, but also an approach that is
adapted to the type of ownership (legal status).

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In spite of the generally accepted notion that effective corporate governance enhances MFI
performance, studies have also reported a negative relationship between corporate governance
and MFI performance (Hutchinson, 2002).

2.2.2 Impact of Corporate Governance on Performance of MFIs in Ethiopia

Eyob (2016) has conducted study to analyze effects of corporate governance mechanisms on the
performance of Ethiopian MFIs. The researcher have selected five MFIs to analyze the effect of
six corporate governance variables (board size, educational qualification of boards, audit
committee size, board gender diversity, business management experience of boards and industry
specific experience of boards) on performance of MFIs measured using two variables (return on
asset and return on equity) by using ten years panel data. The data was analyzed by using
multiple linear regression models.

The result showed that board size, gender diversity and size of audit committee have negative
and significant relationship with financial performance of MFIs whereas industry specific
experience and educational qualification of the board have positive relationship. The study also
found that the effect of business management experience of directors on performance is
inconclusive.

In 2015 has also analyzed the impact of corporate governance on performance of MFIs in
Ethiopia. The researcher collected seven years data from ten MFIs to analyze the effect of
corporate governance variables (such as board size, board gender composition, board
competency, board experience in the finance sector, meeting frequency of , size of audit
committee, CEO duality, and CEO gender) on MFIs performance. The study used descriptive
statistics, correlation and panel data regression methods (fixed effect model). Unlike Eyob
(2016), this study found that board size, board competency, board experience and meeting
frequency of board has a significant impact on the financial performance of Microfinance
Institutions. However, Board gender composition, CEO duality and CEO gender does not have
significant impact on the financial performance of Microfinance Institutions.

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2.2.3 Impact of Corporate Governance on Performance of others Firms in Ethiopia

Some researchers have also conducted to identify the relationship between corporate governance
and performance of firms in other industries. Among these, research conducted by Bonsa (2015)
was one. The researcher has been analyzed to identify the relationship between corporate
governance mechanism and financial performance in insurance companies. Panel data covering
ten years period was collected from nine insurers in operating in Ethiopia. Effect of corporate
governance variables such as board size, chief executive compensation, educational qualification
of directors ,presence of female directors, frequency of board meeting, other business
management experience of directors, industry specific experience of directors on financial
performance were analyzed using fixed effect techniques.

The regression results showed that compensation of CEO, educational qualification of directors,
business management experience of directors, and industry specific experience of directors has
positive and significant effects on financial performance of Insurance companies. On the other
hand, board size, board meeting frequency and presence female directors don‟t have statically
significant impacts on Insurers‟ performance.

A thesis conducted by Tadele G (2017) on the effect of corporate governance on the performance
of private commercial banks in Ethiopia found that board size and variety, number of internal
board subcommittee had statistically significant negative effect on private commercial bank
financial performance. Board meeting frequency was negatively insignificant on banks
performance. The thesis was conducted on seven banks by taking 13 years panel data and
analyzed using fixed effect techniques like many of similar researches.

Similarly Yenesew (2012) has also conducted research titled „The Impact of Corporate
Governance Mechanisms on Firm's Financial Performance: Evidence from Commercial Banks in
Ethiopia‟. Five years data of eight commercial banks was analyzed. Effect of corporate
governance mechanisms practices such as board size, board gender diversity, board members
educational qualification, board members business management and industry specific
experience, and audit committee size on three financial performance indicators (return on asset,
return on equity and net interest margin) was analyzed. The regression results showed that large
board size and audit committee has negative influence on financial performance; whereas board

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members educational qualification has positive effect on financial performance. The research
indicated that industry specific experience of director has positively related with return on asset
but it has a negative effect on net interest margin. Finally, the finding reveals that the percentage
of female directors and board members business management experience does not have a
significant effect.

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2.3 Conceptual Framework

Based on the reviewed literatures the following conceptual frame work has been constructed.

Corporate Governance: Financial Performance of

MFIs:

Figure1 Conceptual framework on the effect of corporate governance on Commercialization of

MFIs

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 CHAPTER THREE

RESEARCH METHODOLOGY

This chapter describes the research methodology and techniques used to conduct the study. It
illustrates the research approach, design and method, population and sample, data source and
type, description of the data collection tools, data collection procedure, ethical considerations
and finally data analysis methods.

3.1 Research Approach

To answer the research questions and get better insight about the effect of corporate governance
on financial performance of MFIs in Ethiopia, quantitative approach was adopted.

3.2 Research Design

To examine the relationship of corporate governance practices and financial performances of

MFIs explanatory research design was employed. This type of research design helps to evaluate
the causal relationship between explanatory and explained variable under study.

3.3 Population and Sampling

3.3.1 Target Population

The Population of the study was registered members of Ethiopian Microfinance Institutions
(AEMFI) with complete three years data and above.

3.3.2. Sampling Frame

The sampling frame for selecting MFIs was the list of registered members of AEMFIs that have
a business period of three years and above was used.

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3.3.3. Sample Size

From the total 34 registered members of AEMFIs 25 MFIs with complete three year data was
selected for the study.

3.4. Types and Sources of Data

In this study both primary data and secondary data were collected. Primary data was collected by
questionnaire. The questionnaire was designed in a way that able capture all corporate
governance variables and distributed physically and through email as appropriate to CEO/ or
other senior management of each selected MFIs. The secondary data also collected from annul
performance analysis report (Bulletin 12 to 14) of Association Ethiopian Microfinance
Institutions over period of three years (2017 to 2019).

3.5 Validity and Reliability

For test the validity of the questionnaire, pretest was conducted before the main primary data
collection.

3.6 Research Ethics

The researcher has taken into account ethics throughout the research process. A written
guarantee was given to the respondents that the information is only for academic purpose and
treated confidentially.

3.7 Data analysis and Model Specification

The data obtained from primary and secondary source was analyzed according to objective of the
study. To estimate the effect corporate governance variables under consideration on financial
performance (profitability) of MFIs, multiple regression analysis was employed. Duet to
combination of cross sectional and time series of the data, fixed effect model was employed
using Statistical Packages for Social Science (SPSS). Panel data involves the pooling of

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observations on a cross-section of units over time periods and provides results that are simply not
detectable in pure cross-sections or pure time-series studies (Freeman 1984) as cited by Bonsa
(2015).

Descriptive analysis was also employed to describe the important features of variables under
study. To identify the relationship between dependent, independent variables correlation analysis
was also conducted.

The following panel regression model was adopted for the study:

Yit = αit + ∑βXit + εit

Where:

Yit dependent variables represent RoA

α intercept
β slope coefficient of explanatory variables
Xit set of explanatory variables in the model represents corporate governance variable under
study such as board size, board subcommittee, boards educational qualification, boards industry
specific experience, numeration, board meeting frequency, CEO educational qualification, CEO
industry experience.

Where subscript i and t denote the individual institutions characteristics (cross sectional
dimension) and time series dimension respectively.

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3.8 Description of Variables

The hypotheses to be tested in the model are how corporate governance practices affect MFIs‟
financial performance. The dependent variable as well as the explanatory variables that expected
to affect profitability of MFIs is described as follows.
Return on asset (ROA): It is the dependent variables that measures profitability of institutions
under the study. It is calculated by dividing net profit to total asset. For the purpose of the study
adjusted return on asset was directly taken from performance analysis of AEMFI.

Board Size (BoDSize): it is a continuous variable and represents total members of board of
directors of MFIs during the period under review. Opposing results have found regarding effect
of board size on performance of MFIs from prior studies (Eyob 2016; Belete 2015). In this study
we expect positive relation.

Board sub-committee (SubCom): it represents number of subcommittees established with in

the main board. Existence of various sub-committees helps the main board to get advice and
sufficient information to strengthening oversight duties. Thus, positive result is expected.

Board educational qualification (BoDEducM): It represents number of board members who

have postgraduate degree from total directors. An educational qualification of board members is
expected to be important for board decision making. Thus a positive result is expected.

Boards’ numeration (NumerationLN): it represents the natural logarithms of total allowance

payment for individual board members per year. The researcher expects positive sign.

CEO educational qualification (CEOEduN): it is a dummy variable taking 1 if a CEO has

postgraduate degree and 0 otherwise. Financial performance of MFIs is expected have positive
relation with level education.

CEO Industry related experience (CEOIndExpN): it represent number of years a CEO has
served in financial institutions. We expect positive result.

MFIs Scale (MFIScaleN): it is a control variable representing institutional scale as categorized

by AEMFI. AEMFI has categorized MFIs in Ethiopia into three groups namely large, medium

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and small based on size of MFI‟s loan portfolio. It dummy variable taking 3 if a MFI is
categorized as large, 2 if MFI is medium and 1 if small.

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 CHAPTER FOUR

RESULTS AND DISCUSSION

In this chapter the empirical findings are presented, and the results obtained are discussed. In
addition to regression model descriptive statistics was also employed in data analysis. For
conducting data management and empirical analysis SPSS statistics 26 software were used.

4.1 Descriptive Statistics Result

Based on the objective of the study, corporate governance variables and financial performance
data of 25 MFIs over three years period was taken to analysis their causal relationship. The
result showed that average member size of board of directors is 6.5 and ranges from 5 to 12. This
result is the bellow recommendation of Council of Microfinance Equity Funds which is 7 to 9
(Chenuos et al, 2014). According to Parthasarathy et al (2019), a MFI‟s board member size need
to be large enough to incorporate required skills and different views, and still small enough to
allow active participation of all members and easy arrangement of meetings. Currently, the
minimum size of board members allowed for MFIs in Ethiopia is five.

The data about number of sub-committees with in the main board showed that sub-committee
established with in MFIs board ranges from zero to 3 and the average is 1.88 (see table 1). As
indicated table 2, 24% of MFIs included in the study has no committee established with in the
main board while the reaming 76% have at least one sub-committee. According to
Parthasarathy et al (2019), board committees can reduce the amount of time all boards spend in
deliberations and results in reduction of superficial decision making by the boards if used
effectively. The same study indicated the importance of risk committee, audit committee, asset
liability committee and human resource committees for MFIs‟ board decision making. As shown
in table 2, from the total MFIs included in this study 72% have two or three committees that
monitor the MFIs, and provide advice and information for main boards to facilitated informed
and effective decision making.

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Table 1. Board size, Board sub-committee, board members education, numeration and ROA of
sampled MFIs
Variables Obs Std.
Minimum Maximum Mean Deviation
Board Size, number 75 5 12 6.51 1.597
Board Sub-committee, number 75 0 3 1.88 1.185
Board members educational 75 0 7 2.59 2.100
qualification, number
Numeration per year, ETB 75 0 120000 26618.67 26664.871
ROA, ratio 75 -.39 .33 .0683 .10754
Source: study result

It can also be observed from the result that allowance or numeration for the individual board
members ranges from zero to ETB 120,000 per annum and the average is ETB 26, 618.67.

Average adjusted ROA of the 25 MFIs is 0.0683 (6.83%) over three years period and ranges
from -0.39(-39%) to 0. 33 (33%) with standard deviation of 0.10754. The result also shows that
on average 2.59 of board members are post graduate holders. Comparing this figure with average
board size, the proportion of board members having post graduate degree holders is 39.78% (see
table 2). Concerning educational qualification of the MFIs‟ CEOs, 60 % of CEOs have master‟s
degree whereas the remaining 40% have first degree (table 3). Similarly 78.7% of CEOs has
more than 10 years of industry experience while 21.3% have six to ten years of industry related
experience (table 4). The results of both education level and industry specific experience of
CEOs reveals that CEO competence is far above minimum requirements set by regulatory body.

According NBE directive No. MFI/21/12, the minimum requirement need to be fulfilled by a
Chief Executive Officer of MFIs is first degree and 5 years of industry experience, of which
three years is management position.

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Table 2. Sub-committees established in sampled MFIs

Number of sub-committee
established Frequency Percent Cumulative Percent
0 18 24.0 24.0
1 3 4.0 28.0
2 24 32.0 60.0
3 30 40.0 100.0
Total 75 100.0
Source: study result

Table 3. CEO educational qualifications

CEO education level Percent

First degree 40
Master‟s degree 60
Total 100
Source: Study result

Table 4: CEO industry experience

CEO industry experience Percent

Above ten years 78.7
Six to ten years 21.3
Total 100
Source: study result

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Association of Ethiopian MFIs has reported categorized scale of MFIs as small, medium and
large based on loan portfolio. Accordingly, majority of MFIs are those in large category. As
shown in the table 5 below, 60%, 28% and 12% of MFIs included in this study are in large,
medium and small category respectively.

Table5: MFI classification by scale

Scale Percent Cumulative Percent

Large 60 60
Medium 28 88
Small 12 100
Total

4.2 Correlation Analysis

Under this section the result of Pearson Correlation analysis is presented. By using Pearson
Correlation the relationship between corporate governance variables and financial performances
(measured in ROA) of MFIs under study was analyzed. Although it does not indicate causal
effect, correlation analysis shows the degree and direction of relationship between dependent
variable and independent variables.

As shown in table 5, the relation of board size and CEO industry experience with RoA is positive
at 5% significance level. Likewise RoA of MFIs under the study is positively related with board
sub-committee, board of directors‟ numeration, educational qualification of boards of directors,
education level CEO and scale of MFIs at 1% of significance level.

According to Hair et al. (2010) as cited by Abel (2019), relationship is considered small when
correlation coefficient is ranges between plus/or minus (±) 0.1 to ± 0.29, while the relationship
is considered to be medium when it is between ± 0.30 to ±0.49, and strong when it is above
equal to ±0.50 and above. Based on this suggestion, relation of board size and CEO industry
experience with ROA of MFIs under consideration is weak, whereas the relationship of board
subcommittee, board educational qualification, MFIs scale (the control variable) and CEO

28 | P a g e
education with ROA medium. Interestingly, the relationship between board allowance
(numeration) and profitability of MFIs measured in ROA is strong.

Table 6: Correlation coefficient

Variables
ROA
ROA 1
BoDSize .281*
SubCom .338**
NumerationLN .534**
BoDEducM .412**
CEOEduN .349**
CEOIndExpN .232*

MFIScaleN .418**
** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

Source: Study result

To conclude the section, the correlation analysis reveals there is a relation between corporate
governance variables and profitability of MFIs measured in return on asset. However it is not
possible to predict the causal inferences using this analysis alone. Therefore, regression model
analysis is presented in the next section to identify the causal effect of corporate governance
variables on financial performance of MFIs in Ethiopia as the objective of the research project.

4.3 Regression Analysis

Before jumping to running regression analysis, explanatory variables identified for the study
were tested whether there is serious multicollinerity problem among them or not. Accordingly
variable inflated factor (VIF) were computed to check multicollinerity among variables, The
VIF values shown in appendix 2 indicate that the explanatory variables included in the
regression analysis have no multicollinearity problem. It is far below the tolerance level which
is 10.

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Table7: Fixed effect regression result
Coefficientsa
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) -.641 .151 -4.258 .000
Year2 .062 .022 .269 2.772 .007
Year3 .085 .023 .367 3.727 .000
BoDSize .008 .008 .113 .990 .326
SubCom -.008 .014 -.089 -.587 .559
NumerationL .031 .015 .258 2.005 .049
N
BoDEducM .006 .007 .116 .937 .353
CEOEduN .071 .028 .319 2.488 .016
CEOIndExpN .026 .024 .099 1.079 .285
MFIScaleN .051 .015 .332 3.317 .002
a. Dependent Variable: ROA

Model Summary
Adjusted R Std. Error of
Model R R Square Square the Estimate
a
1 .753 .566 .504 .07726
a. Predictors: (Constant), MFIScaleN, Year3, SubCom,
CEOIndExpN, Year2, BoDSize, BoDEducM, CEOEduN,
NumerationLN

ANOVAa
Sum of Mean
Model Squares df Square F Sig.
1 Regression .484 9 .054 9.002 .000b
Residual .370 62 .006
Total .854 71
a. Dependent Variable: ROA
b. Predictors: (Constant), MFIScaleN, Year3, SubCom, CEOIndExpN, Year2,
BoDSize, BoDEducM, CEOEduN, NumerationLN

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As specified on the preceding chapter, fixed factor effect model is used to analyze the effect of
corporate governance on the financial performance of MFIs. The regression result is found from
SPSS 26.

The regression result reveals that the overall model is significant at 1% level that suggests the
corporate variables included in the analysis are statistically significant in jointly explaining the
financial performance (ROA) of MFIs in Ethiopia. Likewise as shown in result table, the
adjusted R square is 0.504 reveals that 50.4% of financial performance of MFIs in Ethiopia is
explained by corporate governance practice included in the study such as board size, number
board sub-committee, education qualification of board members, numeration for boards of
directors, competence of MFIs‟ CEO jointly, while the remaining 49.6% of financial
performance is explained by other factors (see table 7). The effect of individual variables under
the study on ROA is presented below.

Board size (BoDSize): The effect of board members size on financial performance is positive as
we expected by but not significant. Belete (2015), who has conducted study in the topic found
positive and significant effect of board size on financial performance of MFIs in Ethiopia. Unlike
this finding, Eyob (2016) has found negative and significant effect of board size on financial
performance of MFIs.

Board sub-committee (SubCom): The effect of number sub-committee established in the main
board is found to be unexpectedly negative but statically insignificant at conventional level.

Numeration (NumerationN): The effect of numeration on financial performance of MFIs in

Ethiopia is positive and statically significant at 5% level. This result reveals that an increase in
board bombers‟ allowance increases their commitment of supervision and supports that result in
financial performance MFIs. This may because as most of MFIs in Ethiopia are regional
governments and NGOs backed where board members are not real shareholders that personally
benefit from profitability of the institutions except the numeration. As of the researcher‟s
knowledge, there were no prior researchers that considered this explanatory variable in their
analysis.

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Educational qualification of board of directors (BoDEduM): The effect of number of board
of directors with post graduate degree on ROA of MFIs as expected by the researcher but
statically insignificant.

CEO educational (CEOEduN): Another interesting finding of this research is that the effect of
level education of a Chief Executive Officer on MFIs‟ financial performance is positive and
significant at the 5% level. This reveals that the higher educational qualification of a CEO, the
better is the financial performance of a particular MFI if other variables remain constant.

CEO industry experience (CEOIndExpN): As we expect the effect of industry related

experience of CEO has positive effect on financial performance of MFIs. The result is, however,
statistically insignificant.

MFI Scale (MFIScaleN): It is used as control variable for the study. Result of the regression
reaves that the effect of MFI on financial performance is positive and significant. This suggests
the larger the MFIs, the better in financial performance of MFIs. This can be because of
economies of scale advantage.

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 CHAPTER FIVE

SUMMARY, CONCLUSIONS AND IMPLICATIONS

In the preceding chapter result of the study was presented and discussed. This chapter deals with
summary of findings, conclusion drawn from the analysis and necessary recommendations based
on the finding.

5.1 Summary and Conclusion

The descriptive statics result showed that average member size of board of directors is 6.5 and
ranges from 5 to 12, which is bellow recommendation of Council of Microfinance Equity Funds.
The result also shows that the proportion of board members having post graduate degree holders
is 39.78% on average. Board sub-committee established with in the main board ranges from 0 to
3 and the average is 1.88. Out of total MFIs included in the study 24% has no committee
established with in the main board while the reaming 76% have at least one sub-committee. The
result also shows that average numeration of board of directors is ETB 26, 618.67 per year and
ranges from 0 to ETB 120,000.

The result on educational qualification of the MFIs‟ CEOs shows that 40 % have master‟s degree
whereas the remaining 40% have first degree. Similarly, 78.7% of CEOs has more than 10 years
of industry experience while 21.3% have six to ten years of industry related experience.

Concerning the scale of MFIs considered in the study, 60% are in large category while 28% and
12% are in small and medium category respectively.

Average adjusted ROA of the MFIs included in the study is 6.83% and ranges from -39%) to
33% with standard deviation of 0.10754.

According to the correlation analysis result, the relation of board size and CEO industry
experience with RoA is positive at 5% significance level. Likewise board sub-committee, board
of directors‟ numeration, educational qualification of boards of directors, education level CEO
and scale of MFIs are also positively related with ROA at 1% of significance level. Based on

33 | P a g e
suggestion by Hair et al. (2010), the relationships between boards allowance (numeration) and
ROA, is strong whereas the relation of board subcommittee, board educational qualification,
MFIs scale and CEO education with ROA is medium. The relation of the remaining two
variables (board size and CEO industry experience) with ROA is weak.

The result of regression analysis conducted also shows that the overall model employed is
significant at 1% level that suggests the corporate variables included in the analysis are
significant in jointly explaining the financial performance (ROA) of MFIs in Ethiopia. Likewise,
the adjusted R square result shows that 50.4% of financial performance of MFIs in Ethiopia is
explained by corporate governance practices included in the study such as board size, number
board sub-committee, education qualification of board members, boards numeration and
competence of CEOs jointly. Out of seven explanatory variables identified for the study three are
found significant and affect the dependent variable in expected direction.

The effect of boards‟ numeration, CEO education level and MFIs scale on financial performance
MFIs in Ethiopia is positive and significant at 5%, 5% and 1% respectively. Whereas the effect
board size, educational qualification of boards of directors and industry experience of CEO is
positive as expected by the researcher but found insignificant. Unlike these, the effect of number
of subcommittee on ROA is unexpectedly negative though it is not significant.

On the bases of these finding, which is aligned with the research project objectives it possible to
conclude that improving corporate governance practices of MFIs such as appropriate number of
qualified board members, reasonable allowance payment for board of directors, recruiting
competent CEO in Ethiopia improves their financial performance and insure sustainability if
other factors remain unchanged.

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5.2 Implications

Based on the findings of this research project the researcher recommends the following for
policy makers, regulatory body and practitioners of the sector.

Board size and educational qualification has positive effect on financial performance of MFIs in
Ethiopia but the influence is not significant. This implies that the concerned body not only need
give due attention for optimum number and qualification of board members but also rethinking
on how to enable optimum commitment and effort of board members. This may include
restructuring the ownership of the institutions to fill the board members with real shareholders.

The effect of board numeration on financial performance is found positive and statically
significant. It implies that management of MFIs need to give due attention for boards allowance
to get required supportive supervision from board members.

Competence of CEO has appositive significant effect on financial performance of MFIs in

Ethiopia. Thus, in addition to other qualities, it is important to target educational qualification
and industry experience during the recruitment process of CEOs.

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 APPENDICES

Appendix 1: Questionnaire
Dear Respondents, this questionnaire is designed to conduct study on research title „‟ Effect of
Corporate Governance on Microfinance Institutions Financial Performance in Ethiopia‟‟ in
Partial fulfillment of the requirement for Degree of Masters in Business Leadership. The
information is only requested for academic purpose that will be treated confidentially. Thus,
please provide genuine response for the questions bellow. Thank you for time in Advance!

Part I: General information

1. Name of the MFI ________________________________________________________

2. Your position in the MFI? (please underline)
a) CEO
b) Deputy CEO
c) Department Manager
d) Any other (please specify)_____________________

3. Your gender
a) Male ____________
b) Female __________

4. Your education level

a) Diploma ________
b) First Degree _______
c) Master‟s Degree and above______
5. Your service year in the MFI
a) Below 2 years __________
b) 2- 5 years _______________
c) 6- 10 years __________________
d) Above 10 years ______________
6. Your role in the board of directors (BoDs) of the MFI

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 a) Board secretory ______________
b) Board member _____________
c) Other (specify )______________

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II: Corporate governance practices

S.N Questions Year in GC

2017 2018 2019
7 What is the size (number) of board
members?
8 Is sub-committee established with in a) Yes a) Yes a) Yes
the board? b) No b) No b) No
If Yes, how many sub-committees
have established?
Which sub-committee have a) Risk Committee a) Risk Committee a) Risk Committee
established? (Underline as b) Audit committee b) Audit committee b) Audit committee
appropriate) c) Risk & Audit c) Risk & Audit committee c) Risk & Audit
committee together together committee together
d) Asset Liability d) Asset Liability committee d) Asset Liability
committee (AlCO) (AlCO) committee (AlCO)
e) Human resource e) Human resource committee e) Human resource
committee f) Nomination committee committee
f) Nomination Others (specify---------- --------- f) Nomination committee
committee ------------------------------ Others (specify--------------
g) Others (specify )------ - -------------------------------
- ------------------------ --
-------

9 What is board meeting frequency of a) Monthly a) Monthly a) Monthly

your MFI? b) Quarterly b) Quarterly b) Quarterly
c) Semi-annually c) Semi-annually c) Semi-annually
d) Annually d) Annually d) Annually
e) Other e) Other (specify)………. e) Other (specify)……….
(specify)……….
10 How much is the boards‟ numeration
of your MFI? (please specify whether

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 the payment is per month or per
meeting )
11 What is the number of boards‟ a. Who have college a. Who have college diploma? a. Who have college
members ? diploma? _________ _________ diploma? _________
b. Who have first b. Who have first degree? b. Who have first degree?
degree? ________________ ________________
________________ c. Who have master‟s degree c. Who have master‟s
c. Who have master‟s and above?__________ degree and
degree and above?__________
above?__________

12 Number of boards members who

have business management
experience?
13 Number of boards members who
have prior experience (as board or
employee) in other MFIs or financial
institutions
14 Number of board members who have
served for two years and above in
your MFI?
15 Education level of CEO of the MFI?
16 What is the total industry relate
experience of the CEO?

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Part III: Reflections on corporate governance variable

Do you think corporate governance characteristics listed in table below have an effect on performance of MFIs? (Please tick for each
questions and give your justification)

S.N CG practice Yes No Please justify

17 Board size?

18 Establishment of sub-
committees with in the
main board?
19 Board meeting frequency?

20 Board numeration?

21 Board members education

level?

22 BoDs business
management experience?

23 BoDs industry related

experience?

24 CEO education level?

25 CEO industry related

experience?

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Appendex 2: Multicollineratiy test (VIF)

Coefficientsa
Collinearity
Statistics
Model Tolerance VIF
1 SubCom .434 2.304
NumerationL .445 2.245
N
BoDEducM .484 2.066
CEOEduN .486 2.059
CEOIndExpN .835 1.198
MFIScaleN .762 1.313
a. Dependent Variable: BoDSize

Coefficientsa
Collinearity
Statistics
Model Tolerance VIF
1 NumerationL .462 2.167
N
BoDEducM .546 1.832
CEOEduN .631 1.585
CEOIndExpN .851 1.175
MFIScaleN .778 1.286
a. Dependent Variable: SubCom

Coefficientsa
Collinearity
Statistics
Model Tolerance VIF
1 BoDEducM .784 1.276
CEOEduN .799 1.251
CEOIndExp .851 1.175
N
MFIScaleN .787 1.271
a. Dependent Variable: NumerationLN

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 Coefficientsa
Collinearity
Statistics
Model Tolerance VIF
1 CEOEduN .918 1.089
CEOIndExp .884 1.132
N
MFIScaleN .928 1.078
a. Dependent Variable: BoDEducM

Coefficientsa
Collinearity
Statistics
Model Tolerance VIF
1 CEOIndExp .953 1.050
N
MFIScaleN .953 1.050
a. Dependent Variable: CEOEduN

Coefficientsa
Collinearity
Statistics
Model Tolerance VIF
1 MFIScale 1.000 1.000
N
a. Dependent Variable: CEOIndExpN

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