THE IMPACT OF CORPORATE GOVERNANCE ON FINANCIAL PERFORMANCE: SELECTED MICROFINANCE INSTITUTIONS IN ETHIOPIA

Abstract

The overall objective of the study was to examine the relationship between corporate governance and financial performance of microfinance institutions in Ethiopia over a period of seven years from 2010-2016. This explanatory study seeks to analyze the impact of different corporate governance mechanisms, particularly board size, board gender diversity, educational qualification of directors, board members experience in the finance sector, meeting frequency of board members, female CEO, and size of audit committee on the financial performance, measure by Return on Asset, microfinance in Ethiopia, and the study also controls the effect of microfinance size. Quantitative approach was employed and it was found suitable for the study since it aimed at establishing the relationship between corporate governance variables and financial performance of microfinance institutions. The population for the study was composed of 35 microfinance institutions in Ethiopia, and by using purposive sampling technique 12 microfinance was selected. Secondary data was collected from the National Bank of Ethiopia and primary data was captured using open-ended questionnaires which were completed by CEO and delegated staffs. The study utilizes panel data in order to examine relationships between variables and fixed effect technique has been applied to find out the most significant variables from considered corporate governance variables. The empirical result shows that board size have negative and insignificant relationship with financial performance of MFIs. And also Audit committee size has negative and significant relationship with financial performance of MFIs. Board gender diversity and Educational qualification of directors have positive but statistically insignificant association with performance of MFIs. While Board experience in the finance sector, female CEO and meeting frequency of the board have positive and significant relationship with ROA. Based on the result of the study, it is recommended that board and audit committee sizes should be kept low. It is better MFIs lead by experienced in finance sector board members, Gender diversity of the board and female CEO should also be maintained and attention should be given for the capacity development of women.