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.