The effects of Corporate governance practices on the financial performance of Forex Bureaus in Kenya
Munyao, David Ngila
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Over the years, despite the very strong intuitive and instinctive belief in the principle that ‘good governance leads to good governance’ and a number of opinion surveys re-affirming the confidence of investors in good governance so far there has been no conclusive evidence, based on empirical research, confirming the causality of this relationship. This study reviews the status of corporate governance research on the Forex bureaus and identifies three serious challenges that are faced by researchers in this field - given that governance is a soft issue that is not best captured by quantitative and structural factors alone, the first major challenge is to define the correct measure(s) for good governance that would capture all the facets of governance. The study was carried out to assess the effects of corporate governance practices on financial performance of forex bureaus in Kenya. The other objectives were to study the effects of the independence and structure of the board, the effects of control systems and audit practices, the effects of corporate governance’s practices on performance and weaknesses of corporate governance. The study is considered important to various stakeholders including major players in the corporate industry, investors, top management of forex bureaus, the government as well as other researchers in this field. The study adopted a causal research design. The population of study comprised all the 111 forex bureaus and a sample of 30 was selected by stratified random sampling. This was because the number was big most Forex bureaus are privately owned and managed. Data was collected from the Forex bureaus financials in CBK and KFBA sources. The finding of this study suggests that established corporate governance practices in forex bureaus in Nairobi, includes the existence of the board of directors that also comprise independent board members, composition of the board of directors and the existence of internal controls. In addition, the study has established the effects and weaknesses of corporate governance practices in forex bureaus in Nairobi, Kenya. The effects include improved profitability, return on investment and reduced business risk, while the weaknesses includes irregular external audits, adequacy of staff rewards and internal controls in place. Notwithstanding the fact that conclusive evidence has yet not been obtained that establishes causality between good governance and good performance, it does not imply that such a vi causal relationship does not exist; all it means is that corporate governance research, so far, has not been able to identify such a relationship and points to the need for more detailed and in-depth research in this field. Specifically, given that the quality of corporate governance involves many soft factors which, most of the times, are not amenable to quantitative measurement it would be worthwhile to undertake greater qualitative research in this area so as to better understand the various factors that affect corporate governance and establish causality between corporate governance and corporate performance. The corporate governance practices should be improved in forex bureaus by constituting board of directors that compose of independent people with integrity, well informed and non-executives directors. Regular external audits should be carried out in forex bureaus and staff reward systems should be all inclusive. The Central Bank of Kenya, as a regulator should formulate relevant laws to ensure corporate governance practices are followed in forex bureaus. The Government should create enabling environments. There is also the need for further development of theory in the area of corporate governance as that would lead to developing more holistic and robust models for corporate governance in organizations which could be tested empirically and form the basis for more effective policy formulation This paper identifies the direction for such future research which should become the basis for guiding the next generation of effective corporate governance reforms.