Relationship Between Corporate Governance and Financial Performance of MFIs in Kenya

Abstract

The purpose of the study was to establish the relationship between corporate governance, proxied by the compensation package provided to members of the board of directors, and the financial performance of Micro Finance Institutions (MFIs) in Kenya for the period 2015 to 2022, during which the trend revealed inconsistencies, with a major decline in years between 2015 and 2022. The study employed a correlational research design within a quantitative framework. The target population comprised the 14 deposit-taking MFIs licensed by the Central Bank of Kenya during the study period. However, only 12 institutions had complete audited financial statements covering the entire period from 2015 to 2022. Therefore, all 12 eligible institutions were included in the analysis, while the remaining two were excluded because of incomplete data. Data were analysed using STATA statistical software. Regression results have indicated a significant negative relationship between corporate governance and financial performance (β = -15.497, p = 0.000). The null hypothesis was rejected, indicating that corporate governance has a statistically significant and negative effect on the financial performance of MFIs in Kenya. Specifically, a one-unit increase in board remuneration was associated with a 15.497-unit decline in Return on Assets, suggesting that excessive director compensation reduces rather than enhances financial performance in this context. This may be attributed to the persistent losses experienced by Kenyan deposit-taking MFIs during much of the study period, where higher board remuneration increased governance costs and consumed financial resources that could otherwise have been invested in lending operations, technological innovation, branch expansion, risk management systems, staff development, and customer acquisition. The adjusted coefficient of determination (Adjusted R² = 0.308739) indicated that board remuneration explained approximately 30.87% of the variation in financial performance among the sampled MFIs. The study concludes that board remuneration constitutes an important corporate governance variable in explaining financial performance among deposit-taking MFIs in Kenya. The study recommends that MFI management should review board remuneration structures to ensure that directors' compensation is aligned with institutional financial performance and long-term sustainability, since excessive board remuneration was found to have a significant negative effect on financial performance.