Financial Performance and Corporate Governance in Microfinance: Who Drives Who? An Evidence From Asia

This paper models the two-way relationship between corporate governance and financial performance of microfinance institutions of Asia. Unlike previous studies, the phenomena of better corporate governance mechanisms present in more financially oriented microfinance institutions is worth investigating. Using a panel of 173 microfinance institutions in 18 Asian countries between 2007 and 2011, a comprehensive corporate governance index (CGI) based on seven corporate governance variables is being constructed as a proxy for the overall corporate governance mechanism of MFIs. Our results suggest that corporate governance has no significant impact on financial stability of MFIs of Asia. However, financial performance to some extent does drives corporate governance mechanisms in MFIs after controlling for MFI related characteristics. The researchers found greater operating expenses and higher portfolio yield to be associated with improved governance practices in microfinance institutions. Given the revealing results of financial performance as a determinant of better corporate governance practices, policy makers and regulators in Asia should devise corporate governance policies and guidelines in a way that doesn't undermine the financial objectives of microfinance.