Governance and financial efficiency of Brazilian credit unions

Abstract Purpose – This paper aims to evaluate the relation between governance and financial efficiency of credit unions in Brazil. The study shows how poor financial efficiency in credit unions may result from undesirable configurations in executive management and other variables related to governance. Design/methodology/approach – The study develops an innovative methodology to classify credit unions according to the level of governance using indicators of representativeness and participation, leadership, management and supervision. This methodology integrates the use of multiple correspondence and cluster analysis. The study then applies stochastic frontier models to analyze how governance affects the indicators of financial efficiency. Findings – The results highlight that better governance substantially increases the efficiency of credit unions in terms of a higher level of credit operations per institution. Originality/value – The paper uses a pioneering survey applied by the Central Bank to almost the total population of credit unions in Brazil. The results highlight how to operationalize a subjective and broad the financial efficiency of credit unions