Board Composition and Outreach Performance of Microfinance Institutions: Evidence from East Africa

Abstract

Past research suggests that board decisions have an impact on the (broadly defi ned) performance and/or mission of organizations ( Zahra et al ., 2009 ;Milana and Ashta, 2012 ). Furthermore, the signifi cant interest in board issues within both academic and policy circles is partly driven by the fact that board decisions and board behavior are believed to be aff ected by board composition and board diversity (e.g., Van Ees et al ., 2009 ). In the academic literature, a large number of studies have analyzed the relationships between various board characteristics -such as board demographics, board diversity, and board processes -and organizational performance ( Carter et al ., 2010 ). Th ese studies focus almost exclusively on for-profi t fi rms. Much less is known about the role that the boards of non-profi t, mission-driven organizations play in attaining organizational goals ( Callen et al ., 2003 ;Alonso et al ., 2009 ).Th is article looks into the role that boards of microfi nance institutions (MFIs) play in the attainment of organizational goals. In contrast to formal banks, most MFIs have a dual objective of outreach to poor customers (i.e., outreach or social performance) and covering long-term costs (i.e., fi nancial performance or selfsustainability) ( Mersland et al ., 2011 ;Daher and Le-Saout , 2013 ). Th e question is how and to what extent the boards help them to reach these objectives.Board composition and poverty outreach of MFIs appear to be related.The proportion of independent, international, female, and/or founding board members appears to be associated with measures of outreach performance using data on MFIs in East Africa.Findings suggest that outreach performance is improved when MFI boards have a higher share of independent, international, and/or female members, which supports the hypothesis that board composition is important in helping MFIs to achieve their social objectives.1 JEL classifi cation codes: G21, G34.T he attributes of microfi nance ' s board members have an impact on attainment of their social objectives.

Determinants of microfinance outreach in Sub-Saharan Africa: A panel approach

“…However, the institutions are not profitable as the average ROA is negative (85%). Mori et al (2015) observed similar negative returns on assets for MFIs in East Africa. This could be because of the diverse nature of the industry as most MFIs in SSA are made up of cooperatives and NGOs with dominant social performance goals.…”

Determinants of the governance quality of microfinance institutions

“…However, unlike Hudon (2010), we control for selection bias, given that only MFIs that decide to be rated by Planet Rating can obtain a governance score. Third, by linking governance quality to MFI outreach performance, we also extend Hudon (2010) and previous studies that relate individual governance mechanism to MFI social performance (Hartarska, 2005;Mersland & Strøm, 2009;Mori et al, 2015;Tchakoute Tchuigoua, 2011). Findings obtained after controlling for selection bias suggest that board expertise, board activity, and ownership type are the main board characteristics that significantly determine the quality of MFI governance.…”

“…Mersland and Strøm (2009) find that CEO-chairman duality is positively associated with MFI outreach. Mori et al (2015) study a sample of East Africa MFIs and find MFIs with more independent and more international board members have better outreach performance. Except for CEO-chairman duality, international board members, and independent directors, other individual governance mechanisms are irrelevant in explaining MFI social outreach.…”

“…Implementing best governance practices may influence decisions made by MFI managers and may lead managers to undertake decisions that allow MFIs to meet their social objective. Previous empirical studies use single indicators and find little evidence of the effect of corporate governance mechanism on MFI social efficiency (Hartarska, 2005;Mersland & Strøm, 2009;Mori et al, 2015;Tchakoute Tchuigoua, 2011). Hartarska (2005) finds that MFIs with independent directors have better outreach.…”

“…Previous empirical research on microfinance governance investigates whether better governance improves MFI financial and social performance (Hartarska, 2005;Mersland & Strøm, 2009;Mori, Golesorkhi, Randøy, & Hermes, 2015;Tchakoute Tchuigoua, 2011), risk taking (Galema, Lensink, & Mersland, 2012), and efficiency (Hartarska & Mersland, 2012). Hartarska (2005) studies a sample of MFIs based in Eastern Europe and Central Asia and finds no relationship among board size, financial expertise, and financial performance.…”