Academic journal article Journal of Finance, Accounting and Management

Effects of Spirituality on Board Service Performance in Malaysian Microfinance Firms

Academic journal article Journal of Finance, Accounting and Management

Effects of Spirituality on Board Service Performance in Malaysian Microfinance Firms

Article excerpt

Introduction

World Bank, other agencies and individuals have been consistent in reporting extreme poverty especially in emerging nations where access to formal productive capital is lacking. In one of such efforts, World Bank (2007) reports an estimated two billion people live with less than $2 a day at a particular point in time. To address this unresolved issue, respective nations, international agencies, non-governmental organizations (NGOs) and commercial enterprises have taken measures aimed at alleviating the endemic poverty through microfinance institutions.

Microfinance has been identified as a workable approach to mitigate this problem by providing productive financial services to clients. The broad objective of microcredit loans is to encourage the poor to participate in income generating activities such as buying raw materials or invest in handsome returns varieties that yield higher production and output (Islam, 2007). Increases in production will also lead to increases in business income and this leads to poverty reduction (Islam, 2007). In Malaysia, the borrower's type of business activity is important in determining the impact of microcredit loans. A study by Ismail (2001) on 60 AIM members showed that borrowers involved in small business activities generated higher business revenue than those involved in agricultural activities.

To achieve the required outreach and maintain a sustainable flow of funds, microfinance institutions explore various means of directing and controlling the affairs of the firm with a mechanism that ensures optimum service delivery, protect rights of all stakeholders and getting back the funds lent to clients through risk evaluation mechanisms. Governance mechanism is undeniably one of the vital constituents of any institution development, with a bigger challenge to Islamic finance system due to its additional risks compared to its conventional counterparts (Hasan, 2008). Therefore, investors, donors and governments are looking for effective mechanism of control to ensure that microfinance institutions (MFIs) make the best use of scarce resources (Hartarska & Mersland, 2012). In addition, according to Iqbal and Mirakhor (2008), a firm in Islamic economic system can be viewed as 'nexus-of-contracts' whose objective is to minimize transaction cost to maximize profits and returns to investors subject to constraints that these objectives do not violate property rights of any party whether it interacts with the firm directly or indirectly. In pursuit of these goals, the authors affirm that firm honors its obligations to explicit and implicit contracts without impinging on the social order. This definition incorporates stakeholders' role in its view of the firm and supports recognition and protection of their rights.

In this regard, erosion of confidence in the corporate vineyards due to concerns about ethical scandals and violations such as Enron and Arthur Andersen, including the US subprime mortgage crisis create negative effects such as the elimination of trust and sense of community in corporations (Gull and Doh, 2004; Neal, 2000). In addition, donor agencies are increasingly vigilant for any signs of corruption in any form of projects they fund irrespective of the modality used. Similarly, despite being perceived as less corrupt, non-governmental organizations (NGOs) are not immune to frauds and corruption. Among the spectacular scandals is the United Way in the US, where the chief executives of the umbrella organization and its Washington DC chapter were convicted for theftand misappropriation of hundreds of thousands of dollars in 1995 and 2004 respectively (Wilhelm & Wolverton, 2004; and Strom, 2006). Another NGO scandal as reported by (Fischer, 2007) is in International Helsinki Federation for Human Rights where the finance officer embezzled EUR 1.2 million. The most common forms of frauds in NGOs include: inflated, duplicate invoices for goods and services procured for a project; 'ghost' employees, participants or beneficiaries that inflate the costs of project activities; kickback arrangements in procurement of goods or services or in hiring of project staff; accepting funds from more than one donor for the same project fictitious NGOs, or politically connected organizations set up to win public contracts (Trivunovic, 2011). …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.