Relationship Between Corporate Governance and Financial Performance of Microfinance Banks in Kenya

Abstract

Prudential corporate governance is important in promoting investors‟ confidence in banking sector.Therefore, the objective of this study was to evaluate the relationship between corporate governance and financial performance of microfinance banks in Kenya. The study used board size, board composition, cost of compliance and ownership concentration as measures of corporate governance while financial performance was measured by return on assets. A descriptive research methodology was adopted in this study. The target population considered in this study is made up of 9 MFBs which were licensed by the CBK between 2012 and 2015. The secondary data was obtained from published audited financial statements of the MFBs. These statistics covered the period 2012 to 2015. Data was described using the descriptive statistics while correlation and regression analysis was the one used to measure the relationship between corporate governance structures and financial performance. The study revealed that there is a strong correlation between performance and good corporate governance. There is a strong positive marginal effect of independent variable - corporate governance (measured by board size, cost of compliance) and financial performance (measured by the return on assets). This means that corporate governance mechanism measured by board size have a positive relationship on the financial performance proxied by return on assets. However, results reveal that board composition and ownership concentration don‟t have any relationship with financial performance and therefore do not affect the firm return on assets. From the study the conclusion is that there exists positive relationship between institutionalization of good corporate governance mechanisms and performance for the microfinance banks studied. Therefore, the study concludes that there is no financial burden in institutionalizing corporate governance. From the study it is evident that good corporate governance increases the agency costs. On the basis of the result of this study, it is recommended that firms should institute appropriate corporate governance mechanism that does not lead to financial burden to the company. There is need therefore the microfinance banks to reduce their board sizes in order to address high board remuneration. It is further recommended that all microfinance banks should have outside board members who have no shareholdings in the firms. This will institute good corporate governance in order to mitigate agency costs and hence increase the performance of their companies.