Influence of Corporate Governance Practices on the Financial Performance of Microfinance Banks in Kenya

Abstract

Microfinance banks play a vital function in the economy by ensuring there are credit facilities to the less-privileged and banking services to people. The annual reports by the CBK reveals that MFBs in Kenya have been reporting financial losses with a few who have low profits. There are different contributing factors to losses in firms and weak corporate governance structures could be one of them. Good corporate governance is essential for MFBs to grow their profitability, increase their accountability, boost transparency, efficiency, and sustainability. Empirical evidence shows that corporate governance directly impacts the financial performance, hence this background imposed the need to scrutinize the corporate governance impact on Kenyan MFBs’ performance. The research's goal was to assess the impact of corporate governance practices on the Kenyan MFBs’ financial performance. The researcher exploited secondary data and descriptive research design and the population were all deposit-taking microfinance banks as at 31st December, 2020. To analyze the amassed information, the scholar employed Pearson correlation together with a multiple regression model to establish the interconnection between the variables of study. The outcomes revealed a significant positive link between the Kenyan microfinance banks’ financial performance and board independence. Additionally, the study uncovered that board size possesses a significant inverse interconnection with the microfinance banks’ performance. Moreover, the scrutiny discovered that board diversity positively and significantly influences the MFB performance. Besides, the findings uncovered that board activity positively and significantly influences microfinance banks performance. Additionally, the research found board competencies positively impact MFB financial performance. Hence, the researcher made a conclusion that corporate governance influences the Kenyan MFBs’ financial performance; thus, there is need to develop robust corporate governance structures that can ensure there is accountability, transparency, and financial sustainability of the MFBs.