Firm size, corporate governance and financial performance of microfinance institutions in Nairobi City County, Kenya

Abstract

Microfinance industry is a key to the Economic Pillar of Kenya’s Vision 2030. The declining performance of microfinance institutions in terms of profitability measured using return on assets is a concern in Kenya and majority of these institutions are beginning to embrace corporate governance to enhance acceptable financial management practices. Microfinance institutions continue to face a myriad of challenges in their quest to enhance financial accessibility in the country. Some of the microfinance institutions have left the market as a result of serial poor performances. The study main objective was to examine the moderating effect of firm size on the relationship between corporate governance and financial performance. The study also investigated the role of firm size as a moderator of the relationship between board size, board duality, board composition and board independence on Central Bank regulated microfinance institutions financial performance in Nairobi City County. This study was anchored on shareholder theory which states that the sole responsibility of business is to increase profits, and is further guided by the Agency theory, Stewardship theory and Stakeholder Theory. The study adopted causal research design. The target population of the study comprised the thirteen Central Bank of Kenya regulated microfinance institutions in Nairobi City County, a census of all the thirteen Central Bank regulated microfinance institutions in Nairobi City County was selected as the sample size. Secondary data was obtained from financial reports for the period 2012 - 2019. The Data were analyzed using Stata SE 14 software. Pearson correlation results revealed that board size, board duality Board composition have a positive significant association with financial performance of Central Bank of Kenya regulated microfinance institutions. Coefficient results of board composition has a positive and significant effect on financial performance of microfinance (β=0.142, p=0.009). Firm size moderates corporate governance and financial performance where the explanatory power of R 2 improved from 46.72% before moderation to 52.68% after moderation implying that firm size as a moderator strengthens the relationship between corporate governance and financial performance. Based on research finding it can be concluded that board size, board duality, board composition and board independence influences financial performance of Microfinance Institutions in Nairobi County. It was also concluded that firm size is a significant moderator on board duality, board composition and financial performance of microfinance institutions. Firm size strengthens the relationship between corporate governance and financial performance thus the study recommends that firm size should be considered in the aspect of financial performance and corporate governance. The study also recommends for moderately sizeable board of management that is neither too large nor too small. Microfinance institutions that have large boards may incur more cost in remunerating the board members. Likewise, a very small board size may lead to the biased decisions or weak decisions. The study recommends the consideration of gender diversity when constituting the board. The study also recommends for an independent board characterized by executive and non- executive directors. The results support the propositions of the agency theory in reducing the agency problem which lead to increase value maximization. It provides a direct link between firm size, corporate governance and financial performance.