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

Abstract

The effect of corporate governance on the financial performance of DTMIs in Kenya was the objective of this paper. Research design adopted was descriptive and involved 8 DTMFIs in Kenya. Data was collected for a 5-year period, 2012-2016, from financial statements of DTMFIs and annual reports from AMFI and CBK. The data was analyzed annually giving a total of 40 data points. Descriptive and regression analysis were used to analyze the data. From the findings board independence had the highest standard deviation meaning that it had the highest variability or high volatility (Risk) in the financial performance. The study found that firm size and liquidity affected ROA of DTMFIs positively. However, board size, board independence, gender diversity and leverage had a negative effect on ROA. The variables had a significant effect on ROA. Firm size and leverage displayed a strong effect on ROA compared to the other variables that displayed a weak effect on ROA. The study concludes that board size, board independence, gender diversity, firm size, liquidity and leverage when combined have a strong effect on financial performance. The study recommends that microfinance institutions reduce board diversity, board size, board independence and leverage while at the same time increasing liquidity and assets in order to enhance the financial performance of the firms. A similar study in other sectors is recommended. Further research can be done on to determine such other variables that influence financial performance of DTMFIs.