The Effect of Corporate Governance on the Financial Performance of Micro Finance Institutions in Kenya

Abstract

The relationship between governance and the performance of microfinance institutions (MFIs) is discussed in this paper. MFI performance encompasses both financial performance and outreach. Good governance in terms of strengthening stewardship, achievement of MFIs’ primary objectives and promoting further development of the industry have been asserted as key elements in the literature pertaining to MFI performance. Good corporate governance has become more important due to the demand for transparency and accountability of funds utilized in microfinance activities. Further, MFIs need to have a solid governance framework to minimize the possibilities of management failures which may jeopardize the efficacious application of received funds from other financial institutions and donors.In prior studies, the nature of corporate governance practiced by MFIs is less understood and no substantive work using multiple MFI outcomes over a number of years has been undertaken. The concerns raised in reviews of individual MFIs and normative discussions of what should constitute best practice do point to the need for better understanding of the nature of corporate governance practiced by the MFIs and also, to understand the nature of the relationship that exists between institutional success and corporate governance especially for developing countries. This study therefore identifies and provides a framework for undertaking corporate governance research relating to MFIs.