ABSTRACT

This study investigates the impact of internal governance mechanisms on the financial performance of microfinance institutions in Cameroon, with a specific focus on the Mmockmbie Cooperative Credit Union Limited (MMOCCUL). Utilizing a quantitative research design, the study analyzes key variables such as board size, board diversity, and frequency of board meetings, examining their relationships with financial performance measured by Return on Assets (ROA). Data were collected from 29 respondents and analyzed using descriptive and inferential statistics, including Pearson correlation and regression analysis. Findings reveal that while board size negatively impacts financial performance, both board diversity and frequency of board meetings positively influence ROA. The study identifies that a larger proportion of independent directors enhances oversight, thereby improving financial outcomes. However, it highlights persistent challenges regarding gender diversity on boards, as many institutions fail to meet the recommended benchmarks. Conclusions drawn from the study suggest that effective internal governance structures are essential for enhancing the financial performance of microfinance institutions. Recommendations include increasing the number of independent directors, promoting gender diversity, and optimizing board size to ensure effective governance. This research contributes to a deeper understanding of the dynamics of internal governance in enhancing the performance of microfinance institutions in Cameroon and informs policymakers and industry stakeholders on best practices for governance improvement.

CHAPTER ONE

INTRODUCTION

1.1 Background of The Study

Internal governance mechanisms are crucial for microfinance institutions, like MMOCCUL, to achieve their objectives, ensuring reliable financial reporting, efficient operations, and compliance with laws. The MMOCKMBIE Credit Union Cooperative Ltd (MMOCCUL) is a category 1 microfinance incorporated in 2016, registration no: 17/035/CMR/SW/55/290/CCA/360/3601, at the Ministry on Agriculture and Rural Development with COBAC and MINFI accreditation N° D-2021/317 and 0000381 respectively.

Mmockmbie cooperative credit union (MMOCCUL) was established in 1999 by a group of community leaders and entrepreneurs in the Mmockmbie area in Cameroon. The union was formed to provide financial services to low-income individuals and group who lacked access to traditional financial institution.

In 1999 MMOCCUL was registered with the Cameroon cooperative credit union league (CAMCCUL), in 2000 Mmoccul began operations with an initial membership of 50 individuals, in 2005 Mmoccul expanded its services to include micro-loans and savings programs, in 2010 Mmoccul partnered with international organisations to receive technical assistance and funding and in 2015 Mmoccul launched its mobile banking platform to increase financial inclusion. As in 2022, Mmoccul has over 10,000 members, comprising individuals, group and organisations from the Mmockmbie area and surrounding communities.

The performance of microfinance institutions (MFIs) is critical to promoting financial inclusion and economic development in developing countries. In Cameroon, MFIs, including cooperative credit unions have been instrumental in providing financial services to underserved populations. However, the performance of MFIs in Cameroon has been mixed with some institutions experiencing challenges in terms of governance, management and financial sustainability. This governance mechanisms on the performance of microfinance institution in Cameroon, using Mmocmbie cooperative credit union (MMOCCUL) as case study.

Recognizing the importance of financial literacy in promoting sound financial behavior, MMOCCUL conducts regular workshops and seminars to educate members about budgeting, saving, and responsible borrowing. This initiative aims to empower me Throughout its operational history, MMOCCUL has evolved to meet the changing financial needs of its members. The incorporation of technology into its operations in the 1990s marked a significant milestone. This advancement enabled the institution to provide more efficient services, such as online banking and mobile money transfers, enhancing the convenience for its members.

MMOCCUL’s mission is to provide affordable and accessible financial services to its members, fostering economic growth and improving their quality of life. The cooperative aims to promote savings among its members and ensure that credit is available for productive ventures. The vision of MMOCCUL is to become the leading cooperative credit union in the region, recognized for its customer service excellence and commitment to the financial well-being of its members. The credit union aspires to be a driving force for economic development and empowerment within the community.

MMOCCUL operates under a democratic governance model, where members have a say in the decision-making processes. The General Assembly, comprising all members, is the highest decision-making body. Members elect a Board of Directors responsible for overseeing the strategic direction and management of the credit union.

 Internal governance mechanism is a process effected by the entity’s board of directors, management and other personnel design to provide reasonable assurance regarding the achievement of objective in the categories; reliability of financial reporting in efficiency of operations and compliance with applicable laws and regulations (Ray and Kurt, 2001).

Internal control consists of five related components which are derived from the manner in which management runs its business. These components are control environment; risk assessment; control activities; information and communication systems and monitoring. These components of internal control apply to all business entities though microfinance institutions may apply them differently to large corporations.

Microfinance institutions engaged five decades ago to empower the poor via microcredits in Bangladash. Since then, microfinance institutions have been increasing globally and offering various products and services to eradicate poverty and social development to achieve their financial and social goal. Now, microfinance institutions have started to provide non-financial services to their client and financial services. These non- financial services are child care, agricultural education, health services, technical aid, and specialized training to improve the environment and individual development. Provision of these non-financial services is now part of microfinance institutions environmental, social and governance (ESG) performance.

As the demand for inclusive financial services at the grass-roots level grows, issues unique microfinance industry should be clearly understood. One of such matters is internal governance practices. This research interns to take a deep look at how corporate governance practices will improve the performance of Microfinance institutions. Specifically, the study investigates the relationship between board size, gender diversity, and frequency of meeting and the performance of microfinance institutions (Bassem,2009; Bakker et al, 2014:123).

According to Sulimany et al. (2021), a good governance mechanism can play a vital role in the performance of microfinance institutions and in improving financial sustainability and share value of microfinance institutions. Corporate governance has become a topic of attention of educators, administrators and researchers over the many years. The literature revealed scant studies on corporate governance and its relation with share price and financial sustainability and microfinance institutions financial, social and environmental performance.

According to Legerwood and White (2006), an internal governance mechanisms adopted by microfinance institutions need to be orderly ,practical and efficient enough to help them conduct business .Internal controls are most effective when they are directly incorporated in the process that support operations and enable quick response to changing economic conditions .Microfinance institutions use internal governance mechanisms to make sure that staffs respect its policies and procedures .Everyone in an organization has the responsibility to ensure internal governance mechanisms succeeds to some extent .Virtually all employees produce information used in the internal control system or take other actions needed to affect control.

The early 1990s were marked by the liberalization of the financial sector in many countries of the Central African sub-region, Cameroon in particular. One of the main consequences of this liberalization was the emergence and proliferation of microfinance institutions (MFIs). The role of these institutions is to reduce the financial constraints of people who are excluded from the classical banking system to fight unemployment and poverty efficiently in these countries. Given this role, governments have taken a number of actions with a view to promoting their development and evolution. According to Pierret and Doligez (2005), only 10% of microfinance institutions present strong sustainability.

The increase in information on crises and bankruptcies affecting these institutions arouses concerns and doubts in the minds not only of the investors and supervisory authorities in the sector but also of the other stakeholders. The main challenge of these socially oriented institutions and social economic firms in general globally is that of their sustainability. Faced with this challenge, they have to remain competitive by allying their financial and social objectives. In fact, these organizations can develop more if they improve their performance. However, as noted above, their poor performance is usually due to the poor reliability of their decision-making and operational processes. In this sense, a recent study identifies governance as one of the main risks in MFIs (Lascelles et al., 2014). In addition, previous studies (Hartarska, 2005; Mersland and Strøm, 2009) find a weak relationship between the classical governance mechanisms and the performance of MFIs, especially when these institutions have different legal statuses.

According to Rosenberg et al. (2009), almost two-thirds of sustainable MFIs are NGOs, cooperatives, public banks or other non- profit organizations. Moreover, the global financial crisis that started in 2007 has reduced the availability of funds and donations to MFIs. These funds are more difficult to collect without showing proof of performance and diligence (Erkens et al., 2012). In this study, we try to determine whether the effect that the governance mechanisms exercise on the performance of MFIs differs according to the specificities of their legal status. Several studies exist on this topic in Europe and in Asia but they are generally descriptive and related to consultancy reports or general guidelines on governance (Thrikawala et al., 2013a). Very few empirical studies are carried out in Africa (Tchakoute Tchuigoua, 2010b), and to our knowledge, none focus on the Cameroonian context. Furthermore, the empirical results regarding governance in one country are not directly transposable to another country because of the effect of socio-cultural variables (Licht et al., 2005).

Besides the field of study, the originality of this study lies in the fact that it takes into consideration the specificities of the legal status, which could explain the differences in the effect that governance mechanisms exercise on the performance of MFIs. Specifically, we seek to analyze the moderating effect of the legal status of MFIs on the relationship between governance mechanisms and MFIs’ efficiency in Cameroon. To achieve this objective.

Cull et al. (2006) showed that throughout north Atlantic countries, intermediaries emerged to supply finance for small businesses and persons, tapping into local information networks. The origin of internal governance dates back in the dark ages, where civilization started from the time of ancient Egypt, Greeks and Romans, they practiced the internal governance mechanisms which include the internal rules and regulations to be followed by the institution such as the Board of Directors, Board size as well as internal audit. However, Hermalin and Weibach (2003) identified the complementarities.

 the correlation between these mechanisms, Internal governance makes a large contribution to the achievement of company goals and the implementation of strategies for their achievement. Successful implantation of internal governance must be independent. That is; work, information, evaluation and conclusions must not be influenced by the company’s management (cull et al 2007).

Keasey et al (1997), the most important features of an effective governance framework are ownership structure (including institutional and managerial ownership), CEO (manager) and director (board member) remuneration, board structure (size and composition), auditing, information disclosure, and the market for corporate control.

Since its establishment, we have been able to open additional branches in Yaoundé, Bafoussam, Douala Bonaberi, Douala Village, Buea, Dschang, and Bamenda. We provide financial services to our members with utmost professionalism and integrity. With the aid of a dynamic staff team, our goal is to provide our members with the best service possible and financial inclusion for all. we are committed to delivering these services with a strong focus on the needs of our members.

Accountability, reliability, honesty, confidentiality, participation, transparency, and the pursuit of excellence in all we do are among our core values. We were awarded the fastest-growing credit union in 2021 by Victoria International Media Merit (VIIMMA). And also, by the Rainbow cooperative Credit Union Network in 202.

Cooperative credit unions are essential financial institutions that play a significant role in promoting economic development through savings mobilization and providing affordable credit facilities to their members. The Mmokmbie Cooperative Credit Union (MMOCCUL) is one such institution that has contributed to the financial empowerment of its members within its locality. This study aims to provide a comprehensive background of MMOCCUL, tracing its historical roots, organizational structure, services offered, challenges faced, and its impact on the community.

1.2 Statement of The Problem

The performance of MFIs in Cameroon is hindered by inadequate internal governance mechanisms, leading to inefficiencies, poor decision-making, and limited financial sustainability. Specifically, Mmockmbie Cooperative Credit Union (MMOCCUL), a prominent MFI in Cameroon, faces challenges related to internal governance, including inadequate risk management practices, limited board expertise, and inefficient management structures. It really can change peoples’ lives for the better – especially the lives of those who need it most” (Kofi Annan, UN Secretary General, 18 November 2004) quoted in (Dixon et al., 2007: 48). In Cameroon we have over 850 registered microfinance Institutions. Microfinance and its activities as well as its origin are associated with poverty reduction. Despite increased regulation on microfinance institutions, challenges in terms of financial sustainability and social responsibility still persist. In Cameroon, the history of microfinance dates back to more than a century in its traditional form known as Njangi. The introduction of modern finance in Cameroon started in 1963 (Creusot, 2006). The poor performance of microfinance institutions is usually attributed to their decision making and operational processes. The governance of MFIs is therefore identified as one of their main risks (Thrikawala et al, 2013a)

Despite the critical role of microfinance institutions (MFIs) in promoting financial inclusion and economic development in Cameroon, many MFIs, including cooperative credit unions, face challenges in terms of governance, management, and financial sustainability. The performance of MFIs in Cameroon has been mixed, with some institutions experiencing difficulties in maintaining financial stability, managing risks, and providing quality financial services to their clients.

Specifically, Mmockmbie Cooperative Credit Union (MMOCCUL), one of the leading cooperative credit unions in Cameroon, has faced challenges in terms of internal governance, including issues related to board size, board diversity, and frequency of board meetings. These challenges have raised concerns about the impact of internal governance mechanisms on the performance of MMOCCUL and the microfinance sector in Cameroon as a whole

In microfinance, governance refers to the mechanism through which donors, equity investors and other providers of funds ensure themselves that their funds will be used according to the intended purpose.

1.3 Research Questions

1.2.1 Main Research Question

What is the effect of internal governance on the financial performance of micro finance institutions in Cameroon?

1.3.2 Specific Research Question

1. What is the effect of the Board size on the financial performance of Mmockmbie Cooperative Credit Union (MMOCCUL)?
2. What is the effect of the Board Diversity on the financial performance of Mmockmbie Cooperative Credit Union (MMOCCUL)?
3. What is the effect of Frequency of Board meetings on the financial performance of Mmockmbie Cooperative Credit Union (MMOCCUL)?

1.4 Research Objectives 

1.4.1 Main Research Objectives  

Determine the effect of internal governance on the financial performance of micro finance institutions in Cameroon.

1.4.2 Specific Research Objectives  

2. To analyze the effect of the Board size on the financial performance of Mmockmbie Cooperative Credit Union (MMOCCUL).
3. To evaluate the effect of frequency of board diversity on the financial performance of Mmockmbie Cooperative Credit Union (MMOCCUL).
4. To analyze the effect of Frequency of Board meetings on the financial performance of Mmockmbie Cooperative Credit Union (MMOCCUL).

1.5 Research Hypotheses

The study’s hypotheses are expressed in the null form as follows;

5. H1: Board size does not significantly affect the performance of Mmockmbie Coopérative Credit Union (MMOCCUL).
6. H2: board diversity does not significantly affect the financial performance of Mmockmbie Cooperative Credit Union (MMOCCUL).
7. H3: Frequency of Board meetings does not affect the performance of Mmockmbie Cooperative Credit Union (MMOCCUL).