Credit unions play an important socio-economic role in the Brazilian financial system, usually providing individual financial loans at lower interest rates when compared to traditional bank institutions. But the financial efficiency of the credit unions is a key component for the survival in a highly competitive sector that tends toward concentration. Ricardo Terranova Favalli (Central Bank of Brazil), Alexandre Gori Maia (UNICAMP) and José Maria Jardim da Silveira (UNICAMP) analyzed the impacts of governance on the financial efficiency of credit unions in Brazil. The paper was published at the RAUSP Management Journal.  

The analysis of the relationship between governance and financial efficiency imposes a number of empirical challenges, particularly those related to the measurement of good governance practices and the financial performance of credit unions. Favalli, Gori Maia and da Silveira used an innovative empirical strategy, using data from two sources: an original survey applied by the Central Bank of Brazil (BACEN) to 1,200 credit unions in Brazil (86% of the total population); and public financial statements of all credit unions obtained from the National Financial System (COSIF). 

First, the authors selected 70 variables of the survey that were related to three main dimensions of governance: representativeness and participations (RP), strategic leadership (SL), management and supervision (MS). Next, the authors applied two multivariate statistical analyses (Multiple Correspondence Analysis and Cluster Analysis) to classify the 1,200 credit unions into five groups that significantly differed in the values of dimensions RP, SL and MS. Groups 1 and 2 (26% of the credit unions) presented the best practices of governance. The groups 3 and 4 (56% of the credit unions) presented intermediate levels of governance. Finally, the group 5 (18% of the credit unions) presented worst levels of governance in all the dimensions (RP, SL and MS).

After the definition of the groups of governance, the authors applied frontier stochastic (SF) models to analyze how governance affects the indicators of financial efficiency. The SF models allowed to authors to identify the technical inefficiency of each credit union. The estimates of the SF models highlighted significant and relatively consistent patterns in the relationship between good governance practices and the financial efficiency of credit unions. In particular, the results indicated that the groups with higher levels of governance do operate more efficiently, based on the concept of a higher number of credit operations (net of loss provision) per cooperative. The author also highlighted the strikingly low efficiency of the group of cooperatives presenting the lowest levels of governance for all dimensions of analysis. Not surprisingly, these cooperatives were also predominantly small in size (low economies of scale advantages), and presented the highest average number of members per employee (bad management practices).