CHAPTER ONE

INTRODUCTION

1.1 Background of Study

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 meetings 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

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.

1.2 Statement of Problem

“Microfinance has proved its value, in many countries, as a weapon against poverty and hunger. 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 risk (Thrikawala et al, 2013a)

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

The main Research Question for this study is,

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

Specifically, it seeks to find answers to the following;

• What is the effect of the Board size on the financial performance of Buea Police

Cooperative credit union?

• What is the effect of the Board Diversity on the financial performance of Buea Police Cooperative credit union?
• What is the effect of Frequency of Board meetings on the financial performance of Buea Police Cooperative?

1.4 Research Objectives  

The main objective of this study is to;

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

Specifically, it seeks to achieve the following;

• To analyze the effect of the Board size on the financial performance of Buea Police Cooperative
• To evaluate the effect of frequency of board meetings on the financial performance of Buea Police Cooperative
• To analyze the effect of Frequency of Board meetings on the financial performance of Buea Police Cooperative.