Corporate Governance and Firm Performance: Evidence from Microfinance Institutions in Tanzania

Abstract

This study examined the impact of corporate governance on the performance of a firm. Two elements of corporate governance were involved namely the board of directors composition and audit committee composition which were assessed to find out their relations to Microfinance Institutions' (MFIs) financial performance. This study was done to contribute specific insights to the relationship and influence of corporate governance on firm performance especially due to limited literature in Tanzania. The study used a cross-sectional design, in which data were collected at a single point in time. Quantitative data were collected from 80 CEOs/Managers of MFIs under study. The study found that most of the respondents, which is equivalent to 66.2%, had the title of managers or supervisors and 17.4% were the CEOs/Directors. Moreover, MFIs agreed to have boards with independence (M=4.48, SD=0.49) and gender diversity (M=4.67, SD=0.41). Moreover, MFIs agreed to have an audit committee with members who had accounting/auditing/finance expertise. The findings from regression results further show that the relationship was significant between board composition (board independence and gender and geographical diversity) and audit committee composition (educational background and experience in microfinance issues) with the firm’s performance. The study concludes that corporate governance influences the financial performance of MFIs in Tanzania. The study recommends that MFIs and policymakers should ensure that the board of directors is characterised by independence and gender and geographic diversity. Also, the audit committee should comprise members who are experts in microfinance to enhance performance.