CHAPTER ONE
INTRODUCTION
1.1 Organisation of the study:
This study looked at the effects of corporate governance practices on the performance of
Category One Microfinance Institutions in Cameroon. To reach our objectives, we divided
our study into 5 different chapters. The five chapters are the Introduction, which is Chapter
One; Literature Review, which is chapter two; The Methodology, which is chapter three;
The Presentation of Findings, which is chapter four and chapter five, which are the
discussion, conclusion and recommendations.
Concerning the chapter One, we have the background of the study, which is bringing out
the evolution of the concept of corporate governance practices, starting from corporate
governance itself, and the different effects it has on institutions, especially on the
performance of Microfinance Institutions (MFIs) in the world, Africa and Cameroon. In the
same background of the study when talking of Cameroon, we looked at the evolution of
category one of MFIs and corporate governance practices. After the background, we have
the statement of the problem, where we talked on the performance of Category One
microfinance. That is, we are going to talk on the different issues that affect the performance
of Category one MFI and we give reasons why we think that corporate governance practices
can be a solution. Following the statement of the problem, we came up with our research questions, objectives, hypothesis, the scope of the study, and the operational definition of
terms.
In Chapter two, we reviewed the concepts, the theories and empirical literature that are
related to this study. Chapter three discussed on the methodology of the study, starting
2from the research design, followed by the area of the study, population of the study,
sampling and sample size, Instruments used in data collection and analysis. Chapter Four
presents the findings from the data collected in both descriptive and inferential statistics,
and finally chapter five is on the discussion of findings presented, conclusion and
recommendations for the study.
1.2 Background of the study:
A series of corporate failures and of financial crises over the past years have raised several
questions and focused attention on corporate governance issues, especially for financial
institutions (Srairi, 2015). The practice of corporate governance is very significant iimproving the performance and the efficiency of an organisation (Ssekiziyivu, Mwesigwa,
Bananuka & Namusobya, 2018). In talking of corporate governance practices, firstly, we
should look at the concept of corporate governance itself. Corporate governance is
concerned with limiting the concentration of power and stewardship, forming a balance
between communal, institutional goals and socio- economic goals, and encouraging an
efficient use of available resources, accountability, use of power and stewardship at the
same time, aligning the interests of individual, corporations and the society (Mohamas &
Saad, 2010; Nkundabnyanga, Sejjaakd, Ahiauzu and Ntayi, 2013; OECD, 2015 and
Safugha, 2017). The root of this concept can be traced back from study of Berles and Means
(1932), which looks at corporate governance as the separation of power between the owners
and Managers. According to Tirole (2001), Looking at corporate governance practice as
the separation of power between ownership and management (Control), is the classical
view of corporate governance of classical economists, from Adam Smith (1976) to Berles
& Means (1932).

As time evolved, the concept of corporate governance was adopted in different countries
and varies across countries because of their different context, especially Legal Systems. In
some countries, corporate governance is seen as a frame that focused on stakeholders
whereas others looked at it as a frame that focused on shareholders or stockholders (Mulili
and Wong, 2011). For instance, countries like France, Germany, Italy and Netherlands, are
example of those that focused on stakeholders and is characterised under the Civil Law
legal systems while countries like Australia, United Kingdom, USA, Canada and New
Zealand developed corporate governance structures that focused on shareholders’ returns
and they are characterised under the common law legal system.
In countries under the civil law, the role of corporate governance was to balance the
interests of a variety of key groups such as employees, managers, creditors, suppliers,
customers and the wider community (Solomon & Solomon, 2004). This approach was
known as the insider model of corporate control as it recognized that the greatest control in
a firm was held by those who were closest to its actual workings (Department of Treasury,
1997). On the other hand, countries that had a tradition of common law, their corporate
governance were supposed to ensure that corporations achieved the objectives set by their
owners. Moreover, shareholders could hold a firm’s management responsible for attaining
the firm’s goals, which include profits. This approach was known as the outsider model of
corporate control as it recognized the distance between the management of a firm and its owners (Department of Treasury, 1997). The corporate governance discussed are the two
contrasting ideal-type national models of corporate governance outsider and insider
models.
In the microfinance literature, governance first appeared in 1997 and emphasised the
relationships between boards of directors and the management of MFIs (Lapenu &
4Pierret, 2006). Further, existing literature emphasises the importance of corporate
governance for the microfinance sector as it is a significant factor for enhancing the
viability of the industry (Hartarska, 2005; Labie, 2001; Mersland, 2011; Mersland & Strøm,
2009; Varottil, 2012). The governance framework is there to encourage the efficient use of
resources and equally to require accountability for the stewardship of those resources
(Cretu, 2012). The aim is to align as nearly as possible the interests of individuals,
corporations and society. Good corporate governance practices lead to development of a framework that provides adequate protection to the interests of stakeholders and reinforces
the fiduciary responsibilities of those vested with the authority to act on behalf of the
stakeholders (Chen & Wu, 2016).
The performance of micro finance institutions is dependent on corporate governance
structure. It is believed that good governance brings investor goodwill and confidence.
Good corporate governance is important in increasing investor confidence and market
liquidity that enhance the performance of the firm (Agola, 2014). Good corporate
governance practices are important in reducing risk for investors, attracting investment
capital and improving the performance of companies (Velnampy & Pratheepkanth, 2012).
At the firm level, the specific CG practices studied in previous research as precursors of
firm performance are board of directors’ structure and functioning (Bhagat & Black, 1999;
Rechner&Dalton,1991; Executive compensation (Buchholtz,Young &Powell,1998;Core,
Holthausen & Larcker, 1999); Market for corporate control (Agrawal & Knoeber, 1996;
Brickley & James, 1987; Ho, 2005); Employment relations (Cappelli, 1999; Delery & Doty,
1996); and other institutional mechanisms (Aguilera et al.,2008; Blair & Roe, 1999; Fiss,
2008).