Effects of Corporate Governance on Financial Performance of Deposit Taking Microfinance Institutions in Kenya

Abstract

Corporate Governance is an aspect that has gained implementation traction in most organizations across various economies. Regulations have been enhanced by various government agencies and other bodies to enforce institutionalization of corporate governance principles in firms more so after the collapse of big firms in USA. Chapter one of the study explains the concept corporate governance its effects and relationship to the financial performance of organizations. CG entails the aspect of directing and controlling firms with the objective of enhancing sustainable growth. This study aimed at examining the impact of Corporate Governance on financial performance of Deposit Taking Microfinance Institutions in Kenya. Corporate Governance variables included i) Board Size, ii) Board Structure iii) Board Competencies iv) Board Composition and v) CEO Duality; while financial performance was on profitability measure of Return on Equity (ROE). Chapter two provides considerations of theories this study was premised, the study was premised on Resource dependence theory, Stewardship theory, Stakeholders theory and Agency Theory. The theories expound on the reasons as to why implementation of corporate governance principles is a value needed for sustainable growth and performance of firms. Various empirical studies as illustrate in this chapter show that corporate governance is crucial element for improved performance of firms. Chapter three provides study design. The study employed descriptive research design on evaluating the implementation of Corporate Governance and its effects on financial performance of DTMIs in Kenya. Secondary data related to the corporate governance variables and financial performances was obtained from the annual reports and financial statement of all 13 Deposit Taking Microfinance Institution between 2013 and 2017. Data was also sourced from Central Bank Periodic for the period under study. The data obtained was subjected to the diagnostic test and data analysis using regression model, with the aim of establishing the relationship between CG and financial performance as explained in chapter four and five. The research finding using regression model showed 11.8% positive direct effects of the chosen corporate variables on financial performance of DTMIs in Kenya. Board size and CEO duality showed significance effects to financial performance of DTMIs. Apart from board size the other corporate governance variables showed negative correlation with financial performance of DTMIs. This was an indication of a small significance of positive direct correlation between corporate governance and financial performance. The study gave limitation as well as suggestions for further studies