Effects of Corporate Governance on Micro Finance Institutions Financial Sustainability in Kenya

Abstract

The study focused on the effects of corporate governance on Microfinance Institutions financial sustainability in Kenya over a period of eleven years from 2000-2011. The study was necessitated by the lack of documented literature on the effects of corporate governance in Kenya given the dynamic structure in the liability composition of these institutions. The main objective of the study was to investigate the effect of corporate governance on Kenyan Microfinance institutions sustainability. The relevant literature was reviewed for the purposes of this study. Explanatory research design was used in trying to establish the causal effect relationship between corporate governance variable (which were; board size; CEO duality; composition of the board and CEO gender) and the financial sustainability of the MFIs in Kenya (measured using ROA). The target population were the 42 registered Micro Finance Institutions under the umbrella body AMFI where a random sample of ten institutions were selected using the cluster sampling technique. Data was collected from both primary sources and secondary sources. Primary data was captured using structured questionnaires completed by the CEOs and the senior management team as they were in a better position to comment on corporate governance affairs. Secondary data was collected from the Mix market which is the most reliable source of microfinance financial data. The study utilized panel data analysis methodology in drawing conclusions about the study. It was found that the average board size was 8 members with 10% of the institutions having the CEO double up as the chairman.40% of the institutions surveyed had a female CEO. Empirical findings confirmed that board size was significant in affecting financial sustainability at 99% confidence level (t values=2.79), CEO gender was significant at 99% confidence level (t values=2.487), CEO duality was significant at 95% confidence level (t values= 7.69) and board composition significant at 99% confidence level (t values=-2.57). The study recommends moderate board size a higher board independence separation of CEO and chairman and a greater incorporation of women in the board.

Key Words: Micro-Finance Institutions, Sustainability, Board Size, Board Composition, CEO duality, CEO Gender.