Microfinance Institutions’ Transparency, Governance and Risk in Sub-Saharan Africa

Abstract

Several microfinance crises (e.g., in 2010 in India) and the Centre for the Study of Financial Innovation (2014) survey results have identified some of the major challenges facing the microfinance industry. Over-indebtedness, high credit risk, weak regulatory and governance environment coupled with poor information disclosure and transparency continue to be major challenges within the industry. Despite the importance of greater transparency and strong governance for MFI sustainability, the existing literature lacks evidence about the factors affecting MFIs’ transparency and whether transparency and governance could impact MFIs’ risk. This thesis is composed of four essays and fills the gap in the literature in the context of Sub-Saharan Africa (SSA).

My first essay provides empirical evidence on whether ownership structure and macro-level factors affect MFIs’ transparency in SSA using a self-constructed transparency index composed of 35 items and the five sub-indices of Mix Market reporting, website accessibility, MFI network membership, rating and price transparency. My second essay investigates the factors that affect the sub-index of MFI website accessibility globally, and whether these factors differ between SSA MFIs and MFIs in other regions. The MFI website is one medium of information communication. I use a three-item index that measures whether an MFI has a website and if the website is accessible to diverse information users. Following the findings of essay 1 and 2, essay 3 examines the impact of transparency on MFIs’ risk based on MFI profit orientation – for-profit (FP) and not-for-profit (NFP) MFIs. Transparency is measured using two proxies: MFI-level transparency measured by the Mix Market rating, and a country-level business disclosure index developed by the World Bank. I use three measures of risk: credit risk, financial risk and failure risk. My fourth essay assesses the effect of MFI-level governance on MFIs’ risk based on MFI profit orientation. This chapter emanates from the findings of essay 3 and uses the three risk measures previously defined there. I measure MFI-level governance using six board characteristic indicators: board size, availability of independent directors, international directors, female CEO, board risk committee and the proportion of female directors. The empirical results indicate that SSA MFIs’ transparency is very low. MFI size and external funding are essential in improving MFIs’ transparency. I also find that MFIs’ transparency and governance have a differential impact on FP and NFP MFIs’ risk. Greater MFIs’ transparency and the availability of a board risk committee reduce NFP MFIs’ financial risks. In addition, greater transparency and the availability of independent and international directors increase FP and NFP MFIs’ credit and failure risk, respectively. This thesis contributes to the development of MFIs’ transparency literature by providing insights into the factors that affect MFIs’ transparency and highlighting the importance of transparency for MFI sustainability. It also contributes to the literature in terms of providing evidence on how transparency and governance affect MFIs’ risk behaviour, and provides the motivation for further research to add to this area of emerging research.