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Are NGOs and cooperatives similar or different? A global survey using microfinance data

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Abstract

Corporate governance remains fundamental to ensuring the social mission alongside the financial sustainability of microfinance institutions. One primary governance issue relates to the legal form used to perform microfinance activities. The sector deploys various forms including Banks, Non-Bank Financial Institutions, Cooperatives and NGOs, but each of them has unique features that lead to different orders of priorities and to distinct structures and mechanisms to pursue such a dual objective. This study compares the board governance model and the performance of cooperative organizations (COOPs) with nongovernmental organizations (NGOs) involved in microfinance. Using data on 352 rated microfinance institutions, the test results show that, compared to NGOs, COOPs have larger boards and a higher number of board meetings. However, NGOs have a greater percentage of international board members. The test on performance reveals that, whereas COOPs are more cost-efficient and charge lower interest rates, NGOs generally perform better in terms of social performance. However, the two organizational types do not perform differently in terms of profitability.

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Notes

  1. For instance as observed by Macchiavello (2017, p. 81), whiles on one hand there is a need for a common approach to microfinance given the scale of legal harmonization in the EU, especially after the financial crisis, “post-crisis reflections also demonstrates the need to appreciate the diversity in the European banking system and the needs of different types of suppliers serving different types of clients’ needs”.

  2. All estimates are rounded to the nearest integer.

  3. Results of the Variance Inflation Factors (VIFs) also demonstrates the absence of serious multicollinearity problems in the model (unreported).

  4. The main explanatory variable (COOP) is time invariant within the panels. Thus fixed effects (FE) is inconsistent.

  5. As a robustness test, Table 7 provides the random effects estimates of the regression of MFI’s social and financial performance on ownership and the set of control variables. Unlike Tables 6, 7 introduces country dummy variables in place of regional dummies and macroeoconomic control variables. Essentially, the results under Table 7 supports the main findings in Table 6 that compared to NGOs, COOPs have a weaker social performance. Additionally, COOPs are more cost-efficient and charge lower interest rates but are less profitable compared to NGOs.

  6. We classify MFIs with assets values above the median as large and those with asset values below the median as small. Similarly, we classify MFIs with age values above the median as mature and those with age values below the median as younger.

  7. In Table 7 where we introduce country and year dummies, ROA is significantly lower in COOPs than in NGOs. NGOs may have better ROA because they may need to generate more revenue to cover their relatively higher operational costs (Mersland and Strøm 2010). Partly, this could also result from the comparatively higher decision-making freedom enjoyed by CEOs of NGOs (Galema et al. 2012).

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Acknowledgements

We wish to thank all the participants (especially Prof. Sebastien Pouget and Arjan Trinks) of the 7th Oikos Young Scholars’ Academy held at the University of Zurich, Switzerland September 4–6, 2017), for their valuable comments and contributions. We also thank Prof. Leif Atle Beisland, School of Business and Law, University of Agder, for his constructive feedback.

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  1. School of Business, Kwame Nkrumah University of Science and Technology, PMB, Kumasi, Ghana

    Kwame Ohene Djan

  2. School of Business and Law, University of Agder, Universitetveien, 19, 4630, Kristiansand, Norway

    Roy Mersland

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  1. Kwame Ohene Djan
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Appendix

Appendix

1.1 Social and financial performance by MFI’s legal status

METRIC

NGO

COOP

Average loan balance per borrower (USD)

341

2371

Percentage of female borrowers

86%

56%

No. of active borrowers’ 000

35,864.9

2534.0

Return on assets (ROA)

4.9%

1.1%

Operating expense/loan portfolio

12%

8%

Yield on gross loan portfolio

23.4%

15.6%

  1. Source: mix market global outreach and financial performance benchmark report 2017–2018.

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Djan, K.O., Mersland, R. Are NGOs and cooperatives similar or different? A global survey using microfinance data. J Manag Gov 26, 641–683 (2022). https://doi.org/10.1007/s10997-021-09567-9

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