Corporate governance and triple bottom line performance of microfinance institutions: empirical evidence from South Asia

Abstract

This thesis empirically investigates the impact of corporate governance mechanisms on the triple bottom line (TBL) performance of microfinance institutions (MFIs) with particular reference to five South Asian developing economies – Bangladesh, India, Pakistan, Sri Lanka and Afghanistan. Accordingly, the thesis at first conducts a systematic literature review on microfinance governance. It seeks to understand the extent to which research on microfinance governance has been done to date and how far it can go from here. From the review findings, there emerges, among others, a gap in the existing literature on the microfinance governance performance relationship. Specifically, the association between corporate governance mechanisms and TBL (financial, social and environmental) performance of MFIs is found non existent in the literature. The current study addresses this relationship through the lenses of agency, resource dependence and stakeholder theories. The study uses a sample of 127 MFIs from the selected five countries. These institutions are listed on the Microfinance Information eXchange (MIX) Market database, a World Bank group with publicly available data for a wide range of variables. The sampled MFIs are also registered with various network organisations in each country, such as the Microfinance Regulatory Authority (MRA) in Bangladesh, Sa-Dhan microfinance network in India, Pakistan Microfinance Network (PMN) in Pakistan, Lanka Microfinance Practitioners' Association (LMFPA) in Sri Lanka and Microfinance Investment Support Facility for Afghanistan (MISFA) in Afghanistan. The study has collected data for governance, firm-level characteristics and MFI TBL performance from MIX Market, annual reports, rating agencies and, in some cases, websites of individual MFIs. The data period is eight years, starting from 2009 and ending in 2016. Using a dynamic panel data approach, namely the two-step system generalised method of moments (GMM), the study finds some evidence of the impact of corporate governance mechanisms on MFI TBL performance in the South Asian region. More specifically, the study reveals that different governance attributes, except board gender diversity, influence each TBL performance dimension differently. This means they can significantly explain either one or two performance dimensions, but not all. However, board independence and Big-4 auditor choice are relatively significant in predicting all performance variables of MFIs. These results stand for and against the three mainline theories and the findings of some past empirical studies. Based on the results, the study accepts and rejects various hypotheses developed from the selected theories and prior empirical findings. It also recommends some future research directions. This thesis contributes to the literature on microfinance governance by examining how different corporate governance mechanisms such as board characteristics, ownership types, audit quality and capital structure influence MFI TBL performance in the context of South Asian developing economies. It develops hypotheses from three theoretical lenses. Multiple theories have been used for this study as it can be argued that any single theory does not fully explain the hypothesised relationships. Furthermore, given the dynamic nature of corporate governance and the MFI performance variables, this thesis applies GMM to control for dynamic endogeneity, which has been neglected by most prior empirical studies in this field. It is expected that the findings of this research will be of particular relevance to microfinance stakeholders. Especially, the study results provide important information to the policymakers and regulators for considering various corporate governance mechanisms to scale up the sustainability level performance of MFIs.