CHAPTER ONE INTRODUCTION             Background of the Study

The purpose of this study is to examine the effect of some corporate governance characteristics on the performance of microfinance  institutions (MFIs)  in Ghana. For  some time now, firms have come to the realisation of how good governance promotes higher returns and consequently improves on the level of confidence of these firms. It has also been identified that the nature and characteristics of corporate governance structures do have a strong effect on both internal and external factors that seek to affect the  performance of the firm (Kyereboah-Coleman & Biekpe, 2005).

It should be noted however that the developed market economies have over the decades made corporate governance a priority policy agenda. In recent times however, the concept is warming itself as a priority policy area  in  developing  economies.  According  to Berglof & von Thadden (1999) the concept of corporate governance was made popular  after the Asian Financial Crisis and  in Africa, it has  been a popular concept due to the  poor performance of firms on the continent. There are studies that have identified how corporate governance has increased the value of  firms by boosting  the bottom line of firms. Gompers et al (2003) for instance found that companies with strong shareholder rights yielded 8.5% more annual returns than firms with weak rights. The study again concluded that firms that were more democratic enjoyed high profits, high valuations, high sales and growth and low capital expenditures. Firms with poor governance systems are  less profitable and have high risk of bankruptcy, low valuations, pay less dividends,

whereas the reverse apply to firms with very good governance systems. They tend to enjoy high profits, low bankruptcy risks, high valuations, and high dividend payouts.

Another study by Claessens (2003) also affirms that  firms are able to get  greater   access  to financing, lower capital cost, high performance  and  better  treatment  of  all stakeholders when the firm has a better corporate governance framework. Apart from experiencing poor performance and risky financing patterns, firms with very poor governance framework create a favourable environment for microeconomic crisis like what took place in Asia in the 1990s and the United States in 2007. Donaldson (2003) has also identified how corporate governance is key in creating a greater investor confidence and market liquidity.

Bassem (2009) defined microfinance as the provision of financial and non-financial services to the rural poor who are mostly classified as unbankable. These people’s exclusion has been primarily due to their levels of poverty and requirement by banks, which at most serve as barriers to their inclusion. The evolution of  microfinance has  been a  direct response to the efforts of individuals, organisations and agencies at  ensuring  that  the poor get access to credit. In their attempts at fulfilling their core mandate of reaching out to  poor  borrowers and also  being  financially  sustainable,  the issue of governance has become a critical issue that can either engender or stifle the growth of MFI institutions. In fact, apart from ensuring that their social goals are reached, governance and financial sustainability of MFIs have become an overriding concern due to the shrinking resource base for donor funds, which was a major financing source for MFIs. The implication is that MFIs have to support themselves (Ledgerwood, 1999). As have been noted in the previous paragraphs, governance systems and frameworks have direct implication for the sustainability of MFIs in meeting their social goals (Labie, 2001).

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