Corporate Governance and Access to Finance - ESBG

For the survival of microfinance institutions Cull et al (2007) find nosignificant relationship between profitability and average loan size.The interpretation is that making smaller loans is not necessarily lessprofitable. No specific test on governance practices is done in the study.Another source of governance related findings is Hartarska (2005), whichshows that, for a sample of central and eastern European MFI, moreindependent boards are more effective. Having larger proportions ofunaffiliated directors is associated with better results. Different stakeholdershave an impact on different outcomes: more donor representativesimprove depth, but have a negative impact on sustainability (profitability).Customers’ representation in the board achieves high sustainability levelsat the expense of depth. Contrary to some of the generally acceptedlinks, audit, rating and central bank supervision have a limited impact onthe outcomes.A general result can be derived from the empirical literature: havingmultiple goals as an organization means that the focus of managers is onmultiple tasks, and evaluating their performance becomes more difficult.As a consequence some of the traditional governance mechanisms,like management performance-based rewards focused only on profits,have externalities. Indeed, the potential transmission of risk to the financialsystem derived from the managers’ incentive schemes would be reducedin these organizations. More powerful boards, and the participation ofstakeholders, under the control of the regulatory bodies, seem to bemore appropriate for these multipurpose institutions, especially whenone of these goals is to increase Access to Finance. Another importantlesson from the literature review is that the financial and institutionalenvironment of the countries influences the Corporate Governance system,especially when the levels of Access to Finance differ substantially.111