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

Abstract

Within the expansive body of literature, the nexus between corporate governance and firm performance remains a vigorously debated topic in corporate finance research. It is adeptly emphasized that the imperative of prudent management and robust governance should rightfully take precedence as companies prioritize enhancing their financial performance. The primary objective of this study was to ascertain the impact of corporate governance on the financial performance of Deposit-Taking Microfinance Institutions (DTMFI) in Kenya. Specifically targeting 14 DTMFIs holding licenses issued by the Central Bank of Kenya (CBK) as of December 31, 2022, the researcher opted for a descriptive research design to illuminate the correlation. In doing so, this methodology assumed a pivotal role in augmenting knowledge, facilitating profound comprehension, and quantifying data. The research spanned from 2018 to 2022, enabling a thorough exploration and derivation of enduring insights. The findings reveal that, under the condition of maintaining all other factors constant, financial performance experiences a notable decline of 30.3%. This suggests that factors not explicitly mentioned in the study contribute to a substantial reduction in financial performance when all variables are held steady. Furthermore, the analysis indicates that a one-unit increase in board size corresponds to a modest 2.6% increment in financial performance. This implies that, with other factors unchanged, the size of the board has a positive and relatively small impact on financial performance, emphasizing its influence within the overall context. Moving forward, an intriguing observation is made regarding board composition. A singular unit increase in board composition triggers a remarkable 52.2% rise in financial performance when all other determinants are maintained at constant levels. This suggests that the composition of the board plays a pivotal role in significantly enhancing financial performance under stable conditions. Moreover, the examination of executive compensation unveils that a unitary increment in executive compensation is associated with a relatively modest 1.2% increase in financial performance. This finding underscores that, while executive compensation contributes positively, its impact on financial performance is comparatively moderate when other factors are unchanged. Lastly, the results highlight that a single-unit increase in firm size leads to a slight 0.3% uptick in financial performance under the scenario of keeping all other factors constant. This suggests that, within the specified context, firm size has a limited but positive impact on financial performance. Conducting an extensive exploration into external influences, market dynamics, or economic indicators presents a promising avenue. Utilizing qualitative research methodologies such as interviews, surveys, or case studies would be instrumental in acquiring nuanced insights into the intricate dynamics that impact financial performance. This qualitative approach allows for a comprehensive examination of factors beyond the scope of the current study, providing a rich understanding of the contextual elements influencing financial outcomes