Governance and microfinance institutions

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  • Corporate GovernanceGovernance and microfinance institutionsAnuschka Bakker Jaap Schaveling Andr Nijhof

    Article information:To cite this document:Anuschka Bakker Jaap Schaveling Andr Nijhof , (2014),"Governance and microfinance institutions", Corporate Governance,Vol. 14 Iss 5 pp. 637 - 652Permanent link to this document:http://dx.doi.org/10.1108/CG-03-2014-0032

    Downloaded on: 18 December 2014, At: 01:20 (PT)References: this document contains references to 39 other documents.To copy this document: permissions@emeraldinsight.comThe fulltext of this document has been downloaded 120 times since 2014*

    Users who downloaded this article also downloaded:Shakil Quayes, Tanweer Hasan, (2014),"Financial disclosure and performance of microfinance institutions", Journal ofAccounting & Organizational Change, Vol. 10 Iss 3 pp. 314-337 http://dx.doi.org/10.1108/JAOC-12-2011-0067Tanweer Hasan, Salehuddin Ahmed, (2009),"Microfinance institutions in Bangladesh: achievements and challenges",Managerial Finance, Vol. 35 Iss 12 pp. 999-1010 http://dx.doi.org/10.1108/03074350911000052Mercedes Rodriguez-Fernandez, Sonia Fernandez-Alonso, Jos Rodriguez-Rodriguez, (2014),"Board characteristics andfirm performance in Spain", Corporate Governance: The international journal of business in society, Vol. 14 Iss 4 pp. 485-503http://dx.doi.org/10.1108/CG-01-2013-0013

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  • Governance and microfinance institutions

    Anuschka Bakker, Jaap Schaveling and Andr Nijhof

    Anuschka Bakker is aPrincipal ResearchAssociate based at IBFD,Amsterdam, TheNetherlands.Jaap Schaveling is anAssociate Professorbased at NyenrodeBusiness Universiteit,Breukelen, TheNetherlands.Andr Nijhof is anAssociate Professorbased at EuropeanInstitute for BusinessEthics, NyenrodeBusiness Universiteit,Breukelen, TheNetherlands.

    AbstractPurpose This paper aims to determine the influence of governance mechanisms on sustainabilityand outreach of microfinance institutions (MFIs). Corporate governance has been identified as a keybottleneck in strengthening MFIs sustainability (financial performance) and increasing their outreach(social impact).Design/methodology/approach First, a literature study to give insight in the microfinance sector isprovided. Subsequently, the data research has been performed based on the statistics of one of thefunds of a Dutch independent investment manager, which is focused on responsible investments indeveloping countries. Hierarchical multiple regression analyses were conducted to examine theassociation between governance mechanisms and the respective dependent variables.Findings The results show that boards of a MFI with insiders (for example, employees) are asignificant predictor of sustainability. Regulation impacts sustainability significantly in a negative way.Overall, the study shows that only a limited number of variables influence the sustainability and outreachof an MFI.Research limitations/implications The limitation of the studied investment fund is that it invests inexpanding and mature MFIs. So the results of this research can only be generalized to expanding andmature MFIs.Practical implications The governance mechanisms that are recommended in the industryguidelines and which are studied here are often not relevant in respect to sustainability and outreach ofMFIs. The approach to microfinance governance should be broadened by focusing more onstakeholders and the decision making process in an MFI.Social implications Good governance is key for the microfinance institutions and even morecomplicated than for regular companies that do not have a double bottom line (sustainability andoutreach). to be successful in the future, and for clients to reach the best end result, it is essential thatthe governance mechanisms that influence the bottom line are determined.Originality/value Not much research has been done with respect to the governance mechanisms,which have impact on the sustainability and outreach of MFIs.

    Keywords Governance, Corporate governance, Financial performance

    Paper type Research paper

    Introduction

    The topic of the present study is impact investing and, more particularly, microfinance.Impact investments are investments made in companies, organizations and funds with theintention of generating measurable social and environmental impact alongside a financialreturn[1]. In essence, impact investing is a way to unlock capital and place it in businessesand projects that generate real social and environmental benefits for people who needthese benefits. To illustrate the point, the underlying idea could be to create more andbetter jobs, for instance, and to provide people with access to affordable housing, cleanwater and education while, at the same time, generating a financial return to the investor.Here, the key to success lies in microfinance, a resource to make certain banking servicesavailable for people or groups who have so far been unable to profit from these services.

    Received 3 March 2014Revised 7 August 2014Accepted 25 September 2014

    DOI 10.1108/CG-03-2014-0032 VOL. 14 NO. 5 2014, pp. 637-652, Emerald Group Publishing Limited, ISSN 1472-0701 CORPORATE GOVERNANCE PAGE 637

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  • Microfinance is a special type of impact investing and can be defined as the provision offinancial services to poor and low-income clients who have little or no access toconventional banks (Rosenberg et al., 2009). Pioneered by Muhammad Yunus andGrameen Bank, microfinance has greatly increased in terms of its visibility in themarketplace. The concepts of microfinance and microcredit have spread to all regions ofthe world and have generated an enormous social impact (Bugg-Levine and Emerson,2011). The many definitions of microfinance in use today have one thing in common: theaim to achieve a positive societal, environmental or sustainability impact through capitalinvestment (WorldBank, 2013; Karlan and Goldberg, 2011; Cull et al., 2006). Besidesfinancial return, microfinance institutions (MFIs) providing this type of financial service arealso focused on social impact.

    Most people will agree that todays world knows many social and environmental challengesthat urgently need to be addressed, but what is new, according to Bugg-Levine andEmerson (2011), is that impact investors are optimistic about the role that business can playin advancing the common good. Although they are aware that market-based strategieshave their limits when it comes to bringing about social change, they also see that awell-functioning impact investing industry has the potential to complement government andphilanthropy by unlocking significant resources. In addition, an increasing awareness ofthe escalating disparity in the way in which wealth is distributed (WorldBank, 2007) incombination with unequal access to opportunities and mounting concern for theenvironment have led to increased pressure to solve these seemingly intractable problems.Although initiatives for environmental and social change are traditionally undertaken bygovernments, there have been some developments in this regard: the role of governmentshas changed. First, governments have been lowering their budgets to make room for freemarket ideologies. This has been the case since the 1980s (Nicholls, 2006). This moreneoliberal approach has led to shrinking funds, resulting in fewer and altered interventionsby the public sector. Second, it is also increasingly recognized that progress in alleviatingpresent-day ills requires much more than government intervention alone (The Economist,2010).

    It goes without saying that the above developments have had a considerable impact on theposition of MFIs. In view of the fact that MFIs will receive less funds from governments dueto the latters restricted budgets and the fact that MFIs seem to become more dependenton other financiers for achieving their goals, it is vitally important for MFIs to show theirsuccess in achieving their two goals: being sustainable and having outreach, the doublebottom line. Because governance has been widely shown, by many researchers, to be acritical issue for any entitys performance, this is exactly where governance mechanismscome into play. The purpose of this study is to uncover the role of governance mechanismsin the performance of MFIs, that is to say in terms of being sustainable (financial return) andhaving outreach (social impact). Ou

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