Tuffour, K. J., Barnor, C. & Akuffo, B. C. Journal of Business Research, Vol. 9, 2015
DO LEADERSHIP STYLES MATTER IN MICROFINANCE PERFORMANCE? EMPIRICAL EVIDENCE FROM GHANA Tuffour, K. J., University of Professional Studies, Accra, P. O. Box LG 149, Legon-Accra, E-mail:
[email protected]. Barnor, C., Department of Banking and Finance, University of Professional Studies, Accra, P. O. Box LG 149, Legon-Accra, Email:
[email protected]. Akuffo, B. E., Options Microfinance Limited, P. O. Box 7, Accra, Email:
[email protected]. ABSTRACT The study draws on the relevance of the full range leadership proposition by showing the relative ability of leadership styles to influence organisational performance in microfinance sector of Ghana. Ghanaian microfinance sector has been concerned with building vibrant institutions within the financial sector. In this direction, managers of these institutions need to bring their leadership styles to bear on the strategic and operational decisions. The objective of the present study is to examine the effect of leadership styles on organizational performance of microfinance institutions in the Greater Accra region of Ghana. The study employed cross sectional survey design using correlation and regression analysis. A simple random sampling technique was used to select 121 institutions in 2014. Multifactor Leadership Questionnaire was used to measure the variables of leadership styles while the business dimension of Malcolm Baldrige National Quality Questionnaire was used to measure organizational performance. The present study found that microfinance managers exhibit transformational, transactional and laissez-faire leadership styles. However, the dominant identified leadership style is transactional. Analyses of data revealed that transformational leadership style has significant positive effect on organizational performance of the institutions. The age of the firm is an important factor in performance while tertiary education of leaders do not matter in the context of young microfinance sub-sector in the Greater Accra region of Ghana. It is recommended that transformational leadership style should be encouraged for the management of microfinance institutions. KEY WORDS: Leadership Styles, Microfinance, Organizational Performance 1.0 INTRODUCTION The liberalization of the financial sector and the promulgation of Provisional National Defense Council (PNDC) Law 328 of 1991 in Ghana saw the establishment of different types of Non-Bank Financial Institutions in the country. There has been, as a result, phenomenal increase in the number of microfinance institutions (MFIs) in Ghana, leading to increased inflow of capital to the productive poor of the country. The Ghana Association of Microfinance Companies (GAMC), one of the umbrella organizations in Ghana has assets worth and loan portfolio of about GH¢279,000 and GH¢850 million respectively as at 31st December, 2012 (GAMC, 2012). This is as a result of the huge prospects that exist in the financial sector of the economy of Ghana. The concept of microfinance however, has been in the country since the act of borrowing from relations and friends in the context of self-help to undertake economic ventures such as trading and farming activities developed. Majority of the poor find it difficult to satisfy the conditions of banks due to poverty and high illiteracy rate as the business plan, for example, demands the services of professionals which they can hardly afford. With the advent of rural banks and other MFIs in the financial sector, the people in the informal sector who were hitherto neglected by the traditional banks began to receive some attention. These MFIs created a niche for themselves in the financial sector of the Ghanaian economy and began reaping the benefits of their endeavours. As a result of the prospects discovered, more firms have sprung up in this sub-sector to take advantage of the ever increasing demand for products and services of the MFIs. The MFIs are now strongly competing within the sub-sector aimed at gaining larger market share of the sub-sector. Some of these companies have collapsed while others have stagnated. Thus, the kind of management style applied has been raised as a key to the performance of such microfinance companies (Brefo, 2009; Guntz, 2011). This is because the firms face similar working environment and customers; thus, to survive and grow require additional leadership skills. 1
Tuffour, K. J., Barnor, C. & Akuffo, B. C. Journal of Business Research, Vol. 9, 2015
In the fast changing and increasingly competitive global market environment, small and medium enterprises (SMEs) are found to exert a strong influence on the economies of many countries (Ladzani & Vuuren, 2002, Brefo, 2009; Tuffour, 2013; Tuffour, Atswei & Agyei, 2015). The microfinance institutions have contributed significantly to job creation, social stability and improved standard of living. Studies have shown that microfinance institutions have played major roles in fostering economic growth, generating employment opportunities and reducing poverty (O‟Regan & Ghobadian, 2004; Arinaitwe, 2006; Ayyagari et al., 2007; Aghion & Morduch, 2010). Microfinance institutions were originally intended to finance the poor communities, help them to sustain a living, build better houses, acquire basic education and fight against poverty. With such primary mission, the performance of microfinance projects were measured by social impact of the projects to the welfare of the intended community (Aghion & Morduch, 2010). This primary mission prevailed until the 1990‟s when different microfinance institutions focused not only on social impact but also on efficient use of funds. The change in focus was as a result of failure of some donor funded projects due to high default rates, poor fund management and lack of knowledge on the better use of funds among the community members served (Zeller & Johannsen, 2006). Empirical studies into the links between leadership styles and microfinance performance have been lacking in Ghana. Notably lacking, is the detailed study of the effect of leadership style on organizational performance and specifically within the context of microfinance sub-sector. The limited or inconclusive nature (Fu-Jin, Shieh & Tang, 2010) of research findings in this area suggests the need to investigate further the nature of the relationship between leadership style and organisational performance especially for the Ghanaian microfinance institutions. In the case of microfinance, the gap is in terms of a holistic understanding of the leadership issues around microfinance performance. Much cannot be said as there is limited literature to support how managers have achieved superior organizational performance for their microfinance institutions relative to other institutions as a result of their leadership styles. When one examines the 2013 edition of the Non-Banking Financial Institutions Sector Performance report by the Central Bank of Ghana, it is apparent that while some Greater Accra- based institutions in the Ghanaian microfinance sub-sector have success stories, others have been forced into liquidation. A typical research question is what are the types of leadership styles that are used by the managers of the microfinance institutions? And what are the effects of the leadership styles on performance of microfinance institutions? The main objective of the study is to investigate the effect of leadership styles on organizational performance of microfinance institutions in the Greater Accra Region. Literature review is in section two while section three contains the methodology. The results and discussions are in section four. The last section contains conclusion and policy implications. 2.0 LITERATURE REVIEW The modern approach for studying leadership styles around which this study revolves is the Full Range Leadership theory. In this approach, leadership is conceptualised by the behavioral areas from laissez-faire style through transactional leadership, which hinges on reward system and punishment to transformational leadership, which is based on inspiration and behavioral charisma (Bass & Avolio, 1997). The approach is chosen because of its usage in management research and the efficacy demonstrated through research findings. The organization‟s success or performance is influenced by the difference in the leadership styles (Ireland & Hitt, 2005; Stahl, 2007). Bass and Avolio (1995) introduce three types of leadership styles: transactional leadership, transformational leadership and passive-avoidant or laissez-faire leadership styles. In the laissezfaire, an avoidant leader may either not intervene in the work affairs of subordinates or may completely avoid responsibilities as a superior. Such a leader is unlikely to put in effort to build a relationship with subordinates. Laissez-faire style is associated with dissatisfaction, unproductiveness and ineffectiveness (Frischer, 2006). 2
Tuffour, K. J., Barnor, C. & Akuffo, B. C. Journal of Business Research, Vol. 9, 2015
According to Avolio and Bass (2004), laissez-faire leadership is comparable to “no leadership” while Gartner and Stough (2002) consider this leadership as a “do-nothing” style of leadership. Transactional style leadership focuses mainly on the physical and security needs of subordinates. The relationship that evolves between the leader and the follower is based on bargaining exchange or reward systems (Bass & Avolio, 1997). Transactional leadership is usually characterized as instrumental in followers‟ goal attainment (Bass & Avolio, 1997). According to Devanadhen and Sofi (2015), transac tional leaders are those who guide or motivate their followers in the direction of established goals by clarifying roles and task requirements. Transactional leaders are very focused on their task and are receptive to the performance of their followers (Avolio & Bass, 2004). For transformational style, leaders encourage subordinates to put in extra effort and to go beyond what they (subordinates) expect (Bass, 1985). The subordinates of transformational leaders feel trust, admiration, loyalty, and respect toward their leaders and are motivated to perform extra-role behaviours (Bass, 1985). Transformational leaders achieve the greatest performance from subordinates since they are able to inspire their subordinates to raise their capabilities for success and develop subordinates‟ innovative and problemsolving skills (Bass, 1985). This leadership style has also been found to lead to higher levels of organizational commitment and is associated with business unit performance (Michael, 2011). In transformational leadership, the leader has the ability to identify the need for change, to set goals as well as to provide guidance towards the change while managing the transition effectively. Transformational leaders are proactive and endeavour to maximize the individual, group and organizational development beyond expectation (Avolio & Bass, 2004; Jeremy, Melinda & Ciller, 2012). In respect of performance, it concerns the evaluation of outcomes of an organization as a result of management decisions on resources and execution of those decisions (Jeremy et al., 2012). The measurement of organizational performance provides information for the managers and employees about the extent to which the agreed targets have been reached. Performance measurements improve control of organization‟s resources, allow adjustment of organization‟s activities and facilitate the rewards and appraisal of the members of the organization (Crabtree & DeBusk, 2008; Obiwunu, Okwu, Akpa & Nwankere, 2011). Performance measurement in microfinance institutions has come under criticism due to the fact that they tend to focus only on the financial indicators leaving the non-financial aspects. This point is supported by Crabtree and DeBusk (2008) when they established that financial performance measurement lacks predictive ability to explain future performance as well as providing little information of the causes and solutions to problems facing organizations. Research has shown that leadership style has significant relation with organizational performance, and different leadership styles may have a positive or negative correlation with the organizational performance, depending on the variables used by researchers (Fu-Jin et al., 2010). Michael (2011) and Koech and Namusonge (2012) report that there is a significant relationship between leadership style and organizational performance. Effective leadership style is seen as a potent source of development and sustained competitive advantage. Leadership style helps organizations to achieve their current objec tives more efficiently by linking job performance to valued rewards and by ensuring that employees have the resources needed to get the job done. It has been estimated that leadership style has significant positive correlation with the organizational performance in both schools and enterprises (Michael, 2011; Koech & Namusonge, 2012). Rosenberg (2002) showed that organizational performance measurements involve four core areas: outreach to the poor, repayment rates, efficiency and sustainability. The outreach to the poor measures the depth and breadth of poverty impact to the community saved. The collection performance measures how well the microfinance institutions are collecting loan repayments from their clients, financial sustainability measures the ability of the institutions to cover operating costs out of the revenue generated from operating activities and 3
Tuffour, K. J., Barnor, C. & Akuffo, B. C. Journal of Business Research, Vol. 9, 2015
efficiency indicates how well an institution allocates and controls its resources. The foregoing constitutes the basis of the methodology used for the study.
3.0 METHODOLOGY Method and Sampling The study employs correlation and cross-sectional survey design to determine if leadership styles of managers (the heads of the microfinance institutions) have effect on the performance of microfinance ins titutions in Greater Accra Region of Ghana. The population for the study was made up of microfinance institutions registered with the GAMC. At the time of the study, official records indicate that there are 173 microfinance institutions in the Greater Accra Region registered with the GAMC. The sample size was calculated based on a mathematical formula developed by Kish (1965) given as
Where n = sample size, N = Population, α = Level of significance Given that there are 173 registered microfinance institutions with the GAMC, a chosen standard level of significance of 0.05 (95% confidence interval), the sample size becomes 121 institutions. In order to give all the respondents equal chance of being selected, a simple random sampling technique was used to select a total of 121 institutions that constituted the sample. Primary data on leadership styles and organizational performance were collected by sending questionnaires to the managers of the selected institutions. Construct, Instruments and Interpretation Leadership has been defined as „the influencing process of leaders and followers to achieve individual and organizational objectives through changes‟ (Lussier & Achua, 2004, p. 8). From the above, it is not enough for leaders and followers to interact in the organization if that does not result in an outcome that accomplishes the combined aspirations of both the individual and the organization. These combined aspirations are formulated in a set of statements for the organization and are referred to as its objectives. All the functions stated above demand that managers possess set of skills and behaviours that can optimize the human, financial, social capital, and all other resources necessary for the crafting of strategic direction and subsequent successful execution. For the purpose of this research, the extent to which these institutions are able to achieve objectives better than others in the microfinance subsector is the very measure of the dependent variable, which is organizational performance. On the other hand, leadership style is the behaviour exhibited by managers of the microfinance institutions. The Multifactor Leadership Questionnaire (MLQ5X) developed by Bass and Avolio (1995) was used to measure the variables of leadership styles. A leader embodies all three leadership styles (transformational, transactional and laissez-faire) and uses any of them in the organization based on the situation at hand. The MLQ5X consists of a five-point Likert scale on which the managers indicated the extent to which the items represent the leadership styles they use. According to Avolio and Bass (2004), the MLQ5X is among the most widely used instruments to measure transformational, transactional and laissez-faire leadership behaviour as its internal reliability has been proven many times. These include the internal consistency which is represented by the Cronbach‟s Alpha as 0.86 (Bass & Avolio, 1995), 0.83 by Lowe, Kroeck and Sivasubramaniam (1996) and 0.94 by Hemsworth, Muterera and Baregheh (2013). The questionnaire contained 45 statements which identified and measured the key aspects of leadership behaviour and each statement related to transactional, transformational or laissez-faire leadership factors. The respondent was required to judge how frequently the behaviour described in the statement was exhibited. The MLQ uses a scale of 0 to 4, with „0‟ indicating a “not at all” rating of the behaviour described in the statement. 4
Tuffour, K. J., Barnor, C. & Akuffo, B. C. Journal of Business Research, Vol. 9, 2015
The other end of the scale, „4‟, indicates a “frequently if not always” rating of the behaviour described in the statement (Bass & Avolio, 1995). The Malcolm Baldrige National Quality Award (MBNQA) has been the framework extensively used for improvements in organizational performance (Flynn & Saladin, 2001). To operationalize organizational performance in this study, the business dimension of the MBNQA framework was adopted. The business dimension in MBNQA is a composite of customer, financial and operational performance that includes human resources and public responsibility. The Cronbach‟s alpha result for this instrument is 0.76 (Ojokuku, Odetayo & Sajuyigbe, 2012). This indicates a high level of internal consistency among the items on the scale. The instrument consists of fourteen items designed to measure managers‟ perception of business results on a 7point Likert scale with „1‟as Strongly Disagree to „7‟as Strongly Agree. A score of one (1) means the lowest in terms of achieving set targets as compared with similar organizations. A score of seven (7) denotes the highest in terms of achieving set targets as compared with other similar organizations. When a firm scores 7, the interpretation is that, it is better able to achieve set targets as compared with similar firms that score lower than 7. A score of 1 means a firm is less able to achieve set targets as compared with similar firms with scores of more than 1. Model Specification Correlation and regression analyses were used to establish the relationship and effect of leadership styles on the performance of microfinance institutions respectively. Theoretically, leadership styles affect the extent of organizational performance. Within this framework, the regression model is specified as: OPt . = β0 +β1 Tfs t + β2 Trs t + β3 Lfs t + β4 X*t + εt Where, OPt . = Organizational performance Tfs t = Transformational style Trs t = Transactional style Lfs t = Laissez-faire style X*t = a set of control variables (gender of leaders, experience of leaders, level of education of leaders, age of company) = Random error term β0, β1, β2, β3 and β4 are the coefficients of regression, it is expected that β 1 > 0; β2 > 0; β3 > 0 and β4 >/< 0. 4.0 FINDINGS Controls and Measurements The leadership styles and the organizational performance have been operationalized by using the MLQ5X and MBQA questionnaires. The MLQ5X has been used extensively by researchers such as Bass and Avolio (1995), Avolio, Bass and Jung (1999), Bass and Avolio (1997), Lowe et al. (1996). In this study, we controlled gender, education, experience of leaders as well as age of company as these factors have been found to be important in related previous studies (Cohen, 1993; Russ & McNeilly, 1995). In order to undertake analyses, the data and questionnaire should be statistically appropriate. We followed Podsakoff, Mackensie and Podsakoff (2003) ex-ante and ex-post methods as well as solutions proposed by Sea-Jin, Witteloostuijn and Eden (2010) to deal with possible measurement problems. For the ex-ante, we ensured that the respondents were anonymous while informing them that there were no right or wrong answers to any question. As a result, they provided answers honestly. This information was provided on the cover page of the questionnaires together with the confidentiality statement. Another ex-ante solution was to undertake a pilot study to test the validity of the questionnaire before using it for the actual study. The pilot study as well as the actual data set shows high Cronbach‟s alpha for all the items (greater than the 0.7 standardized level). To examine the reliability of the instruments, the Cronbach‟s alpha was calculated to be 0.869 and 0.904 for MLQ5X and MBQA respectively. This is one of the ex-post solutions to the measurement error problems (Podsakoff et at., 2003). In addition to using standard instruments in literature, we tested for their validity. The 5
Tuffour, K. J., Barnor, C. & Akuffo, B. C. Journal of Business Research, Vol. 9, 2015
commonality values of all the items were high. The average correlation value was 0.788 and 0.719 for leadership styles and organizational performance respectively, indicating that all the items are key factors in the leadership styles and organizational performance subscales. Demographic Characteristics of Respondents The demographic characteristics used were: age, gender, level of education and experience. Majority of microfinance managers (48.8%, i.e. 59 respondents) were aged between 31 and 40. Males accounted for 78 (64.5%) and females were 43 (35.5%) of the sampled managers. Statistics from the study indicate that, in terms of the number of years that the managers of these microfinance institutions have been at post, the majority of the managers had spent averagely 3.5 years representing 55.4%. This was followed by those who had spent less than 2 years which had a frequency of 33 and represented 27.3%. Managers who had spent above five years at post representing a frequency of 21, corresponding to 17.3%. Most managers (114), representing 94.2% had tertiary education. Leadership Styles of Managers Table 1 shows the results of the descriptive statistics of leadership styles. A higher mean value generally means that there is a higher level of measured construct. The table reports on three leadership styles. Each style has its subscales with their means (obtained by adding all the responses for the particular factor and dividing the sum by 121). Avolio and Bass (2004) provide the guide that leaders need to score a mean of at least 3.0 on the five transformational leadership behaviours (idealized influence-attribute, idealized influence-behaviour, inspirational motivation, intellectual stimulation and individualized consideration) to be considered users of the transformational leadership style. The value from table 1 is approximately 3.0 as the mean for the construct. It can be said that microfinance managers within the Greater Accra Region exhibit transformational leadership style. For transactional leadership behaviours, the average score on the three transactional leadership subscales [contingent reward, management-by-exception (active) and management-by-exception (passive)] should be at least 2.0. The score in table 1 is 2.26 which means the managers utilize their transactional leadership style in certain situations. Laissez-faire leadership is considered present when a rating of greater than 1.0 is assigned on the laissez-faire subscale. The laissez-faire score on the table is 1.77 and since it is greater than 1, it can be concluded that managers make use of their laissez-faire style. In summary, the finding is that managers of microfinance institutions in the Greater Accra Region make use of all the behavioural styles. Table 1: Descriptive Statistics of Leadership Styles of Managers Leadership Styles Leadership Styles Subscales N Idealized Attributes 121 Idealized Behaviour 121 Transformational Style Inspirational Motivation 121 Intellectual Stimulation 121 Individualized Consideration 121 Mean Scores 121 Contingent Reward 121 Transactional Style Management By Exception (Active) 121 Management By Exception (Passive 121 Mean Scores 121 Laissez-Faire Style Laissez-faire 121 Source: Developed by the authors, 2014
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Mean 2.8223 2.9401 3.1756 3.0000 2.8905 2.9657 3.0062 2.5000 1.2831 2.2631 1.7686
Standard Deviation 0.70522 0.66773 0.54068 0.57100 0.52231 0.44314 0.54051 0.71589 0.82597 0.45606 0.80698
Tuffour, K. J., Barnor, C. & Akuffo, B. C. Journal of Business Research, Vol. 9, 2015
Among the stated job functions which reflect the transformational leadership theme are provision of strategic leadership for the organization, ensuring achievement of organizational goals, conferring with board members, organizing officials and staff members to discuss issues, coordinating activities and resolving problems. The presence of the transactional leadership style is a requirement for such functions as analysis of operations to evaluate performance of a company and its staff in achieving objectives, and to determine areas of potential cost reduction, programme improvement and policy change. The presence of laissez-faire among the managers can lead to unsustainable institutions and it is not surprising that there are varying stories when it comes to the sustainability of these institutions. These findings are supported by previous works on leadership style and organizational performance (Michael, 2011; Puni, Ofei & Okoe, 2014; Devanadhen & Sofi, 2015). Ojokuku et al. (2012) stated that banks and financial institutions that have the prevalence of transformational and transactional styles recorded better performance than those with laissez-faire. Correlation Analysis and Discussion A bivariate correlation test conducted between transformational leadership style and organizational performance revealed a correlation figure of 0.368. This connotes a medium measure of positive relationship between organizational performance and transformational leadership at the 0.01 level of significance (see Table 3). In examining the nature of the relationship between organizational performance and the individual transformational leadership style subscales in table 2, a moderate relationship was reflected in the five subscales. The coefficient of correlation was 0.362 for Idealized Consideration (Attribute), Idealized Consideration (Behaviour) was 0.386, Inspirational Motivation was 0.318, Intellectual Stimulation was 0.365 and lastly Individualized Consideration was 0.168. From table 2 all the subscales except that of Individualized Consideration are statistically significant at the 0.01 level.
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Table 2: Correlation between Leadership Styles Subscales and Organizational Performance
1) Idealized Attributes 2) Idealized Behaviour 3) Inspirational Motivation 4) Intellectual Stimulation 5)Individualized Consideration 6) Contingent Reward 7) Mgt. By Exception (Active) 8) Mgt. By Exception (Passive) 9) Laissez-Faire 10)Organizational Performance
1
2
3
4
5
6
7
8
9
10
1 0.586** 0.361** ** 0.630 0.073 0.403** 0.409** ** 0.323 0.366** 0.362**
1 0.389** ** 0.553 0.199* 0.552** 0.267** * 0.181 0.294** 0.386**
1 ** 0.413 0.064 0.374** 0.281** -0.027 -0.022 0.318**
1 0.130 0.562** 0.382** * 0.190 0.177 0.365**
1 0.147 0.090 0.148 0.088 0.168
1 0.132 0.162 0.230* 0.250**
1 0.117 0.129 0.385**
1 0.692** -0.075
1 0.030
1
** Correlation is significant at the 0.01 level (two tailed) * Correlation is significant at 0.05 level (two tailed) 1= Idealized Attributes, 2 = Idealized Behavior, 3 = Inspirational Motivation, 4 = Intellectual Stimulation, 5 = Individualized Consideration, 6 = Contingent Reward, 7 = Management-By-Exception (Active), 8 = Management-By-Exception (Passive), 9 = Laissez-Faire Style, 10 = Organizational Performance Source: Authors‟ Calculation Based on Field Dat
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Tuffour, K. J., Barnor, C. & Akuffo, B. C. Journal of Business Research, Vol. 9, 2015
Transformational leadership can lead to high-performing organization due to the supportive, delegative, participative and collaborative leader-follower relationship that evolves in organization (Avolio & Bass, 2004). It has been found out that transformational leadership accounts for between 45% and 60% of the performance of organizations (Bass, Avolio & Jung, 1999). Therefore, the findings of this study support the expected relational analysis that all transformational leadership behaviours have a positive correlation with organizational performance (Obiwuru et al., 2011; Ojokuku et al., 2012). From table 3, the correlation coefficient between transactional leadership style and organizational performance was 0.244. This represents a weak positive relationship between the two variables. In terms of the transactional leadership factors and organizational performance (table 2), Contingent Reward was 0.250 and ManagementBy-Exception (Active) has correlation coefficient of 0.385. The last of the transactional leadership factors, Management-By-Exception (Passive) has -0.075. This means that there is a negative relationship between the Organizational Performance variable and the Management-By-Exception (Passive) factor. All the subscales with the exception of Management-By-Exception (Passive) are statistically significant at the 0.01 level. On transactional leadership and organizational performance, the results indicate that Contingent Reward and Management by Exception (Active) have a medium positive correlation with organizational performance. This result is expected given the definition that transactional leaders are those “who guide or motivate their followers in the direction of established goals by clarifying roles and tasks requirements” (Ojokuku et al., 2012; Devanadhen & Sofi, 2015). The study finds that Management-By-Exception (Passive) correlates negatively with organizational performance. This relation is expected since such managers respond to adverse situations after they have occurred. Worsening issues of loan delinquency, high incidence of employee fraud and escalating operational cost of microfinance institutions all result from managers reacting to issues other than being proactive in their decisions and actions. On whether there is a correlation between laissez-faire leadership and organizational performance of managers in microfinance institutions within the Greater Accra Region, the coefficient of correlation figure of 0.03 is positive, though it happens to be the weakest. This is also not significant. It is noted that, features of laissezfaire leaders include avoidance of solving important problems, taking decisions and have late reactions to urgent problems. Previous findings of similar studies established that laissez-faire style is associated with dissatisfaction, unproductiveness and ineffectiveness (Avolio & Bass, 2004). The findings of this study are consistent with this observation as there was no significant relationship between laissez-faire style and organizational performance. Controlled variables (age of company, gender, level of education and experience of leaders) were used in the present study. It was revealed that, although there is a positive relationship between each of the controlled variables and organizational performance, they are not significant. In other words, these factors are not instrumental in determining the extent of organizational performance.
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Table 3: Correlation between Leadership Styles and Organizational Performance Age of Gender Experience Educational TransformaCompany of Leader of Leader Level of tional Style leader Age of Company 1.000 Gender of Leader 0.085 1.000 Experience 0.269** 0.107 1.000 Educational Level 0.025 -0.170 0.099 1.000 Transformational 0.168 -0.043 0.037 -0.112 1.000 Style (Tfs) Transactional Style 0.075 0.195* 0.012 -0.182* 0.542** (Trs) Laissez-faire Style -0.045 -0.026 -0.042 0.082 0.293** Organizational 0.027 0.151 0.142 0.057 0.368** Performance
Transactional Style
Laissezfaire Style
1.000 0.565**
1.000
**
0.030
0.244
**. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Source: Authors‟ Calculation Based on Field Data, 2014
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Organizational Performance
1.000
Tuffour, K. J., Barnor, C. & Akuffo, B. C. Journal of Business Research, Vol. 9, 2015
Regression Analysis and Discussion The result shows that leadership style dimensions (transformational, transactional and laissez- faire) were joint predictors of organizational performance. This is reflected by the significant F-statistics. Transformational leadership style was a significant positive predictor of organizational performance. Relatively, it is the most important leadership style in determining organizational performance. This finding agrees with the work of Fu-Jin et al. (2010), Obiwuru et al. (2011) and Jeremy et al. (2011) that leadership style has significant effect on organizational performance. This indicates that transformational style of leadership focuses on the development of value system of employees, motivational levels, morale and skills. This induces employees to perform as expected. Transactional leadership style though a positive predictor of organizational performance is not significant in the case of managers of these microfinance institutions. Laissez-faire is a negative predictor of organizational performance and it is also not significant. When the controlled variables were included in the model, there was no significant difference in the ability of the leadership styles to predict organizational performance. Transformational leadership maintained its important role in contributing to organizational performance. It was noted that leaders with tertiary education are likely to perform better than those without such level of education. Also, experience does not matter in the case of the studied microfinance institutions. This is because the microfinance subsector is relatively young with an average age of five years. Thus, leaders could still be in the early stages of the learning curve. The leadership of the microfinance is dominated by males who do not show much significant difference in effective management as those managed by females. The age of the firms shows a significant contribution to the performance of the institutions. This might be due to a number of factors: a) ability to retain workers who gain experience over time, b) the possibility of cumulatively building clients‟ base, c) building of credibility and trust from the populace, and d) ability to offer variety services to enhance the usage of the funds.
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Table 4: Regression Results Results without Control Variables Unstandardized Standardized T-statistics Coefficients Coefficients B Standard Beta error Constant 2.137 0.563 3.796 Transformational Style 0.999 0.231 0.444 4.323 Transactional Style 0.180 0.262 0.082 0.687 Laissez-faire Style -0.202 0.124 -0.163 -1.624 Gender Educational Level Experience of Leaders Age of Company
Sig.
0.000 0.000 0.493 0.107
Results with Control Variables Unstandardized Standardized Coefficients Coefficients B Standard Beta error 1.609 0.727 1.039 0.234 0.462 0.113 0.281 0.052 -0.183 0.129 -0.148 0.268 0.161 0.129 0.407 0.391 0.089 0.211 0.225 0.077 1.040 0.237 0.462
T-statistics
Sig.
2.213 4.439 0.402 -1.425 1.484 1.042 0.936 4.394
0.029 0.000 0.688 0.157 0.141 0.299 0.351 0.000
Dependent Variable: Organizational Performance Adjusted R-Square = 0.463; F statistic = 10.64 and significance of F statistics = 0.000 for the model without control variables while adjusted RSquare = 0.201; F statistic = 6.046 and significance of F statistics = 0.000 for the model with control variables Source: Authors‟ Calculation Based on Field Data, 2014
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Tuffour, K. J., Barnor, C. & Akuffo, B. C. Journal of Business Research, Vol. 9, 2015
5.0 CONCLUSION AND RECOMMENDATIONS This study has investigated the effect of leadership style on organizational performance in microfinance institutions in the Greater Accra Region of Ghana. The results of this study revealed that there is a relationship between leadership style and organizational performance. The study found that transformational, transactional and laissez-faire leadership styles are all exhibited by managers of these institutions. It was not therefore surprising that transformational and transactional leadership styles have positive effects on the organizational performance of the institutions. However, the most important is transformational leadership style. Our conclusion is that transformational leadership style is a form of style that the management of microfinance institutions can adopt if the institutions are to improve their performance. The results also indicate that Contingent Reward and Management by Exception (Active) styles have significant positive correlation with organizational performance. Microfinance managers may need to pay attention to formulation and implementation of effective reward and recognition systems as well as exercise proper control over the staff, systems, policies, materials and methods to achieve desired results. The results of the study and literature show laissez-faire leadership style is never effective. It is recommended that managers should discard this leadership style so as to improve organizational performance. This calls for greater involvement in guiding subordinates to achieve organizational goals especially in the microfinance subsector. The infancy of the sub-sector points to the fact that most management practices are on experimental basis and managers need to be highly involved in guiding staff in the execution of their tasks. Since there is evidence that transformational leadership leads to high performing organizations, it is recommended to existing and potential managers of microfinance institutions that they should inspire pride and power in their staff by cultivating admirable values that make the staff see them (managers) as reference models. Such leaders are required to act with integrity, must be inspirational enough to provide a vision of what is possible and how to attain them. Equally important is the expectation that such managers encourage creative thinking by allowing their staff to question their own beliefs, assumptions and values. Last but not the least, these managers should share in developmental needs of staff and build a supportive environment. Policy-makers and stakeholders in the country who deal with microfinance institutions such as Bank of Ghana and Ghana Association of Microfinance Companies should facilitate the training of microfinance leaders on transformational leadership style while avoiding the laissez-faire leadership style. A contribution of this research is that transformational leadership style is the best form of leadership style for the performance of microfinance intuitions. However, the study did not consider the external macroeconomic factors. Other studies need to consider how the macro-environment interacts with leadership to influence microfinance performance.
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