Governance and Performance of Microfinance institutions in Sri Lanka

Abstract

This paper establishes facts to evaluate the governance factors affecting the performance of micro finance institutions in Sri Lanka, in terms of outreach and sustainability. Through literature, five independent variables under governance having an impact on performance was identified, namely: remuneration ( fixed / variable) of managers, size of the board, independence of the board via the presence of non affiliated board members, the diversity of the board, and the availability of an independent auditor within the organization. The study is carried out based on a purposively selected sample of 42 microfinance institutions operating in Sri Lanka, which have been in operation for more than ten years. Data was collected via a self administered questionnaire and published financial data of these selected institutions It was determined as evidenced in data that the type of compensation received by the managers is not associated with performance of the sampled Institutions. The results identify trade-offs between micro finance institution`s outreach and sustainability, based on the board size, and on the proportion of unaffiliated directors. Moreover, the study shows that a higher representation of female members on the board (diversity), leads to better performance. The study also reveals that availability of an internal auditor does not indicate a significant relationship on the performance of these Institutions.