An Evaluation of How Institutional Characteristics, Agency Cost, Business Strategy and Governance affect Sustainability of Microfinance Institutions in Ghana

Abstract

The research aims to establish the relationship between the sustainability of microfinance institutions and the factors that affect it. A model was proposed that seeks to offer an explanation of sustainability of Microfinance Institutions (MFIs) in Ghana. The proposed model identified four categories being: institutional characteristics, agency costs, business strategy and environment/governance with the microfinance institutions identified as Financial Non-Governmental Organizations, Rural Banks, Credit Union Associations, Savings and Loans Companies and Susu institutions. The research study analyzed the sustainability of microfinance institutions by an initial exploratory study piloted on 14 executive directors in qualitative interviews and 116 executive Directors in research questionnaires using both qualitative and quantitative techniques. The results of the study established positive relationships between sustainability and two out of the four factors namely; business strategy and environment/ governance, implying that the strength of the factors that affect the long term survival of microfinance institutions in Ghana are not the same, they differ in terms of their impact. Therefore, managers and policy makers should pay more attention to these identified factors if they are to survive long into the future and continue to play the critical role for which they were set up.

Keywords Agency costs, Microfinance, Moral hazard Sustainability, Subsidy.