Impact of corporate governance mechanisms on sustainability of selected microfinance institutions in Cape Town, South Africa

Abstract

A highly uneven income distribution and South Africa’s economic structure has over the years produced a larger number of the so called ‘unbankable’ families or households that are not served by the commercial retail-banking sector. Microfinance institutions (MFIs) emerged as an important tool for poverty alleviation and as a substitute in providing access to credit facilities to those individuals. However, many MFIs have failed to sustain and grow their business due to malpractices and poor implementation of sound corporate governance mechanisms. This study aims to identify the impact of corporate governance mechanisms on sustainability at selected MFIs in Cape Town. The study was undertaken in order to bridge the information gap and increase the knowledge base on the issues of corporate governance and sustainability of MFIs as this lack of information may be due to insufficient research in the sector. A survey research design by employing the triangulation method was used to gather data from selected MFIs (n=15) in Cape Town. Quantitative, qualitative and secondary data instruments were used for data collection. Participants for this study were selected through the use of purposive sampling. Data were analysed through SPSS V24 to generate descriptive and statistical results. Cronbach’s alpha value was employed to determine the reliability of the dataset. The study found that most MFIs have no governance mechanisms in place that act as a blue print to address governance issues. Only a few MFIs distinguish the positions of Chief Executive Officer (CEO) and Chairman. In addition, this research showed that MFIs are struggling to be profitable as most of them continuously record lower levels of operational self-sufficiency and return on assets. The study recommends the ideal board size of MFIs, board diversity, separation on the positions of CEO and the Chairman, the use of the King IV report, and strategies for sustainability.