Disclosure practices and governance quality: evidence from micro finance institutions

Abstract

Purpose The purpose of this paper is to assess the role of governance structure and composition and other institution-specific attributes in disclosure practices of microfinance institutions (MFIs) in an emerging market contest. Bangladesh is a country which is considered to be a pioneer in providing micro-finance to the underprivileged people to improve their entrepreneurial capacity. Design/methodology/approach The paper utilises a survey of three groups of users to elicit their opinions and the recommendation of the donor and regulatory agencies to construct a disclosure index. Further ordinary least squares regressions, both parametric and non-parametric, are used to analyse the association between disclosure levels and governance mechanisms and other MFI characteristics. Findings Using a large sample of 564 MFI firm-year reports in Bangladesh, the results show that the overall disclosure levels were around 70 per cent in 2010 and have not improved since 2004. The results also show that the frequency of board meetings, qualifications of MFIs’ board members and MFI size are positively associated with MFIs disclosures. However, board size, board independence, audit firm and other control variables have no such effect on disclosure. This implies that MFIs should focus in board effectiveness rather than its composition. Research limitations/implications Using a general purpose financial reporting framework, the paper examines how effective boards can improve financial reporting standards of MFIs for better monitoring by international donor agencies, regulatory bodies and depositors. Originality/value This is the first substantive study, to the best of the authors’ knowledge, that uses data based on a questionnaire survey and the annual financial statements of a large sample of MFIs from Bangladesh that has been at the forefront of microfinance in emerging countries. Prior studies only used Web-based information, namely, Mix-Market, which ranks country on the basis of its disclosure criteria supplied voluntarily by MFIs, and thus suffer from selection bias. In this study, an attempt has been made to develop an empirical model to explain the role of governance quality in disclosure practices of MFIs.