The Effect of Corporate Governance on Financial Performance of Microfinance Banks in Kenya

Abstract

The study examined the effect of corporate governance practices on the financial performance of microfinance banks in Kenya. The corporate governance practices discussed include the proportion of non-executive directors, board size and board gender diversity. Firm size was used as the control variable. The study was based on a descriptive cross-sectional research design. The data gathered was from secondary sources. A multiple linear regression model was used to establish the relationship between the independent and dependent variables. ANOVA analysis was also used to test the overall significance of the model. The study found that board size had a positive significant effect on ROA while proportion of NEDs had a positive insignificant effect on financial performance as measured by ROA. This can be explained by the fact that firms with higher proportions of NEDs are more likely to experience insignificant financial performance improvement because NEDs are commonly part-time workers; this will undermine their ability to monitor and advise the board because of the lack of information which reduces the NEDs‟ ability to apply their function efficiently. Aside gender diversity showed a negative significant effect on the financial performance. The relationship between ROA and board gender diversity may be due to tokenism that suggests that forcing female director appointment or mandating gender quotas can reduce financial performance in MFBs with strong cultural resistance. This may also be explained by the fact that the positive effects of gender diversity may diminish in MFBs with higher female economic participation and empowerment. The trend in ROA and growth in total assets shows that there has been a tremendous improvement in the financial performance of MFBs. These results can be attributed to the adoption and implementation of corporate governance practices. Therefore it can be concluded that corporate governance has a significant effect on the financial performance of microfinance banks in Kenya as presented by a strong correlation coefficient of 57.9% and a p value of 0.0001 for the overall model. The results of the study show that good corporate governance practices enhance financial performance. Finally, CBK through their prudential regulations should ensure that the corporate governance disclosures in the annual reports are not simply statement of good intentions but are actually implemented at firm level. This will greatly improve the level of corporate governance adoption, implementation and by extension financial performance