Investigating the Role of Social and Financial Performance in Corporate Governance of Microfinance Institutions; An Empirical Evidence from Asia

Abstract

Good corporate governance is considered as a basic building block of success for microfinance institutions as it helps them in achieving their social and financial goals. Endogeneity poses a serious threat to the authenticity of corporate governance and performance studies because of the endogenous nature of many governance and performance variables. The underlined study addresses the issue of endogeneity in governance and performance relationship in microfinance sector of Asia by answering the question whether social and financial performance determines the corporate governance mechanism of MFIs in Asia. Microfinance institutions of Asia work exclusively with the mission of social welfare hence play an important role in the economic and financial development of a region. This study uses an index of corporate governance, constructed on the basis of seven internal governance mechanism variables, as an indicator of the overall corporate governance mechanism of MFIs. A panel of 173 MFIs from 18 Asian countries for a period of five years is selected as a final sample. Data is collected from MIX market website and their risk assessment reports and is analyzed on STATA 11 and SPSS 17 for hypothesis testing. By employing GLS model, our results indicate insignificant impact of corporate governance on financial and many social performance variables which are attributed to the endogenous nature of this relationship as the significance of results improved by studying relationship in reverse direction by employing ordered logit model. Our results indicate that social performance is an important determinant of corporate governance mechanism of MFIs even after controlling for MFI related characteristics while financial performance has little effect on the governance practices of microfinance institutions.