The Association between microfinance rating scores and corporate governance: a global survey

- Weak governance is a major threat to microfinance performance and growth.
- Performance measurement is unusually complex in the microfinance industry.
- We apply rating scores as performance metrics and study their link to governance.
- Several governance structures are significantly associated with rating scores.

The global microfinance industry has experienced high growth rates over the past decades, and the World Bank foresees a future market with billions of customers. However, the industry's continued growth is contingent on its ability to create a governance structure that supports microfinance institutions' long-term performance. Because microfinance institutions' performance is multidimensional and difficult to measure, prior research has not been successful in establishing consistent associations between governance structures and microfinance institutions' performance. We apply microfinance rating scores - a unique innovation of the microfinance industry - as a summary performance metric and find that several governance metrics are related to microfinance performance. Specifically, we find that CEO/Chair duality has a negative relation to rating scores, whereas the number of international board directors, the presence of internal auditors and the level of competition intensity are positively associated with rating scores. These findings should prove useful in an industry in which there is no established 'best set-up' for governance mechanisms.