Effects of Corporate Governance on the Financial performance of Micro-Finance Institutions in Ethiopia
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Date
2016-01
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Addis Ababa University
Abstract
Studies have shown that good corporate governance (CG) have led to significant increases in
economic value added of firms, higher productivity, and lower risk of systemic financial failures
for countries. On top of this the purpose of this study is to analyze effects of corporate
governance mechanisms on the performance of Ethiopian MFIs. From the total of 34 MFIs
which are operating in the country, five MFIs have been selected for the study by way of a
purposive sampling technique and 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) have been used for the study.
On the other hand, financial performance was measured using two variables (return on asset
and return on equity). The study also used leverage, growth and capital adequacy ratio of MFIs
as control variables. The effect of CG examined by using panel data from year 2005 to year 2014
gathered from the audited financial statements of five sample MFIs and the study used
quantitative research approach. Secondary financial data were analyzed by using multiple linear
regression models for two profitability measures (ROE and ROA).The empirical result shows
board size, gender diversity and size of audit committee have negative and significant
relationship with performance of MFIs while industry specific experience and educational
qualification of the board have positive relationship; and the effect of business management
experience of directors on performance is inconclusive. Based on the result of the study, it is
recommended that board and audit committee sizes should be kept low. Gender diversity of the
board should also be maintained and attention should be given for the capacity development of
women.
Keywords: Corporate Governance Mechanisms, Agency Theory, Financial Performance, MFIs
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Keywords
Corporate governance mechanisms; agency theory; financial Performance; MFIs