THE EFFECT OF CORPORATE GOVERNANCE IN GROWTH AND PERFORMANCE OF

MICROFINANCE ENTERPRISES IN KENYA

A RESEARCH PROPOSAL SUBMITTED IN PARTIAL FULFILMENT OF THE

REQUIREMENT FOR THE AWARD OF THE DEGREE IN FINANCE AT KENYATTA
UNIVERSITY

NOVEMBER, 2019
DECLARATION

This project is my own original work and to the best of my knowledge it has not been

submitted for a degree award in any other University or institution of higher learning.

Signature……………………………..date……………………………..

This project has been submitted for examination with my approval as University

Supervisor

Signature…………………………………….date …………………….
ACKNOWLEDGEMENT
I wish to acknowledge my sincere appreciation to the following people without whom

this project work would not have been successful. It may not be possible to mention all

by name but the following were singled out for their exceptional contributions.

My profound gratitude goes to my supervisor for her commitment and

personal interest in the progress of this study. her wise counsel, constructive and

Innumerable suggestions made this work come to completion.

Finally and most importantly, I wish to thank my God the Almighty for bringing me this

far. I pride in his name because He always makes my dreams come true.
DEDICATION

I would like to dedicate this project to God the Almighty for bringing me this far.
ABSTRACT
Prudential corporate governance is important in promoting investors’ confidence in banking
sector. Therefore, The objectives of the study were to analyze the effect of financial
accountability on growth of microfinance institutions, assess financial sustainability on growth of
microfinance institutions and establishing how financial transparency affect the growth of
microfinance institutions in Kenya. Good corporate governance has become more important due
to the demand for transparency and accountability of funds utilized in microfinance activities.
Further, this elements have led to greater sustainability. The study used board size, board
composition, cost of compliance and ownership concentration as measures of corporate
governance while financial performance was measured by return on assets. A descriptive
research methodology was adopted in this study. The target population considered in this study is
made up of 9 MFBs which were licensed by the CBK .The secondary data was obtained from
published material. However, results reveal that board composition and ownership concentration
don’t have any relationship with financial performance and therefore do not affect the firm return
on assets. , to understand the nature of the relationship that exists between institutional success
and corporate governance especially for developing countries. This study identified and provided
a framework for undertaking corporate governance research relating to MFIs.From the study the
conclusion was that there exists positive relationship between institutionalization of good
corporate governance mechanisms and performance for the microfinance banks studied. Firms
should institute appropriate corporate governance mechanism that does not lead to financial
burden to the company.

It was concluded that not all aspects of the corporate governance induce growth in the industry.
This study recommends that the country therefore needs to strengthen policies to improve
institution-level corporate governance in order to attract investors and increase the overall
growth.
Contents
THE EFFECT OF CORPORATE GOVERNANCE IN GROWTH AND PERFORMANCE OF
MICROFINANCE ENTERPRISES IN KENYA............................................................................1

DECLARATION.............................................................................................................................2

ACKNOWLEDGEMENT...............................................................................................................3

DEDICATION.................................................................................................................................4

ABSTRACT.................................................................................................................................5

CHAPTER ONE..........................................................................................................................8

INTRODUCTION.......................................................................................................................8

1.1Background to the Study.........................................................................................................8

1.1.1 Corporate Governance........................................................................................................9

1.1.2 Financial Performance......................................................................................................10

1.1.3 Effect of Corporate Governance on Financial Performance.............................................11

1.2Research Problem.................................................................................................................12

1.3 Objectives of the study.........................................................................................................13

1.4 Research Questions..............................................................................................................14

1.5 significance of the study......................................................................................................14

1.6 Scope of the study................................................................................................................15

CHAPTER TWO.......................................................................................................................16

LITERATURE REVIEW..........................................................................................................16

2.1 Introduction..........................................................................................................................16

2.2 Theoretical framework.........................................................................................................16

2.2.1 Agency theory...................................................................................................................16

2.2.2 Stakeholder Theory...........................................................................................................17

2.2.3 Stewardship Theory..........................................................................................................17

2.3 Determinants of Financial Performance..............................................................................18

2.3.1 Board Size.........................................................................................................................18

2.3.2 Financial sustainability.....................................................................................................19

2.3.3 Financial accountability....................................................................................................19

2.3.4 Financial transparency......................................................................................................20

2.4 Empirical study....................................................................................................................20

2.5 Conceptual Framework........................................................................................................21

Source; researcher (2019)..........................................................................................................22

CHAPTER THREE....................................................................................................................23

RESEARCH METHODOLOGY...............................................................................................23

3.1 Introduction..........................................................................................................................23

3.2 Research Design...................................................................................................................23

3.3 Target Population of the Study............................................................................................23

3.4 Sampling Design..................................................................................................................24

3.5 Data Collection Methods.....................................................................................................24

3.5.1 Reliability and validity......................................................................................................25

3.6 Data Analysis.......................................................................................................................26

3.6.1 Analytical model...............................................................................................................26

3.6.2 Test of Significance..........................................................................................................27

CHAPTER ONE

INTRODUCTION

1.1BACKGROUND TO THE STUDY

Generally, corporate governance entails how an organization is managed or run. The World
Bank and the Asian Development Bank define cooperate governance as the way by which power
structures manage the resources of a country so as to foster development. In the context of
micro-finance, governance refers to the effective use of the resources of different stakeholders
such as the creditors, investors, and donors. One of the most important aspects in microfinance is
ensuring that deposit taking is well-managed, and that the collected deposits are used for the
purposes they were originally intended for. The corporate governance plays a key role in as far
as the growth if economies is concerned. It is essential that external forces are used to tame
interests of the managers of the microfinance organizations. There are many justifications why
microfinance institutions (MFI) should be well governed. Whenever there are instances of fraud
in the MFI, the industry is tainted in the eyes of the international stakeholders such as investors.
Bearing in mind that Kenya’s economy is largely supported by the small and micro-enterprises,
withdrawal of foreign investors would lead to negative effects on the economy. Examples of
such scandals happened in Uchumi and CMC Motors (Murigi et al, 2014). Corporate
governance issues in both the private and public sectors have become a popular discussion topic
in the last two decades (Hartarska 2005). There have been some legislative changes and
provisions imposed by governments on public and private organizations around the world to
improve on their governance arrangements. It is therefore necessary to point out that the concept
of corporate governance of MFIs and very large firms have been a priority on the policy agenda
in developed market economies for over a decade (Bassem 2009). Further to that, the concept is
gradually warming itself as a priority in the African continent. Indeed, it is believed that the
relative poor performance of the corporate sector in Africa have made the issue of corporate

governance a catchphrase in the development debate. Several events are therefore responsible for
the heightened interest in corporate governance especially in both developed and developing
countries. The subject of corporate governance leapt to global business limelight from relative
obscurity after a string of collapses of high profile companies. Enron, the Houston, Texas based
energy giant and WorldCom the telecom behemoth, shocked the business world with both the
scale and age of their unethical and illegal operations. These organizations seemed to indicate
only the tip of a dangerous iceberg. While corporate practices in the US companies came under
attack, it appeared that the problem was far more widespread. Large and trusted companies from
Parmalat in Italy to the multinational newspaper group Hollinger Inc.Adephia Communications
Company, Global Crossing Limited and Tyco International Limited, revealed significant and
deep-rooted problems in their corporate governance. Even the prestigious New York Stock
Exchange had to remove its director (Dick Grasso) amidst public outcry over excessive
compensation (La Porta, Lopez and Shleifer 1999). In Kenya, the issue of corporate governance
has been given the front burner status by all sectors of the economy. This is in recognition of the
critical role of corporate governance in the success or failure of companies. Corporate
governance therefore refers to the processes and structures by which the business and affairs of
institutions are directed and managed, in order to improve long term shareholders‟ value by
enhancing corporate performance and accountability, while taking into account the interest of
other stakeholders (Jenkinson and Mayer, 1992). Corporate governance is therefore, about
building credibility, ensuring transparency and accountability as well as maintaining an effective
channel of information disclosure that will foster good corporate Performance

1.1.1 CORPORATE GOVERNANCE

Corporate governance has been defined in a variety of ways. In general terms, corporate
governance is concerned with the organizational structures and processes for decision making,
accountability, control and behavior at the top of organizations. According to Morin and Jarrell
(2000), corporate governance is the framework that controls and safeguards the interests of the
relevant stakeholders. The Cadbury Report (Cadbury 1992,)defined corporate governance as “the
system by which companies are directed and controlled”. This is the widely used definition in the
governance context. The Cadbury report further explained that the responsibilities of the board
include setting the strategic aims and implementing the strategies, providing the leadership,
supervising the management and reporting to shareholders on their stewardship. Corporate
governance is considered as enhancing the reliability and quality of public financial information,
and thereby enhancing integrity and efficiency. The literature on corporate governance suggests
that the role of a regulatory authority is important in improving an entity’s performance.
Governance researchers Bhagat& Black (1998) and Kahan and Rock (2003) highlighted the role
of different instruments in implementing corporate governance. These instruments included the
board of directors, board size, independent directors, CEO, managers, government, political
regime, judiciary and regulatory authority. They further argued that independent directors, CEO,
board of directors and managers can improve the performance of the institute through the

Performance of their fiduciaries .The role of the regulatory authority is important to safeguard
the stakeholder rights and implement corporate governance policies. The experience of
corporate governance for MFIs is drawn from best practices of any organization which should be
customized to features and environment and address the specific problems of these institutions.
Corporate governance guides an MFI in fulfilling its corporate mission and protects the
institution’s assets over time (Mersland& Strom 2009). Good governance in the Kenyan MFIs
plays an important role in increasing outreach, improving transparency, accountability,
sustainability, profitability, efficiency, effectiveness, responsibility and responsiveness to the
changing environment

1.1.2 FINANCIAL PERFORMANCE

Performance can be defined in many ways. It has been defined as the amount of utility or
benefits derived from the firm or the organization by its stakeholders (Rashid, Islam & Anderson
2008). The continued viability of an institution depends on its ability to earn adequate return on
its assets and capital. Good earnings performance enables an institution to fund its expansion,
remain competitive in the market and replenish and increase its capital evaluation of earnings.
The performance relies heavily upon comparisons of key profitability measures such as return on
assets and return on equity to industry benchmark and peer group norms. According to
Kagalwala and Ram, (2003) many institutions throughout the world have disappeared due to
weaknesses in board parameters of risk management functions. Institutions that must survive
need Higher Return on Assets (ROA). This is a net after tax profit divided by total assets. It is a

Critical indicator of profitability. Companies, which use their assets efficiently, will tend

to show a ratio higher than the industry norm. A myriad of financial ratios are available for
assessing performance of microfinance institutions (Alternative Credit Technologies
2005).Return on asset (ROA),Operational self-sufficiency, Financial self-sufficiency, Return on
equity (ROE) fall within the domain of profitability measures.ROA measures and tracks MFIs
ability to generate income based on its assets. The reason why ROA is the most appropriate
measure is due to the fact that it provides a broader perspective compared to other measures as it
transcends the core activity of MFIs, namely providing loans and tracks income from all
operating activities including investments and also assesses profitability regardless of the MFIs’
funding structure.ROA is expected to be positive as a reflection of the profit margin of the MFI,
otherwise it reflects losses.

1.1.3 EFFECT OF CORPORATE GOVERNANCE ON FINANCIAL PERFORMANCE

The relationship between firms financial performance and corporate governance in microfinance
institutions (MFI) utilizing a self-constructed global data set is focused on the effect of board
characteristics on the Microfinance Institution's financial performance. The results show that
split roles of Chief Executive Officer (CEO) and chairman and a female Chief Executive Officer
are important explanations. Therefore, the notion that corporate governance affects the financial
performance of Microfinance institutions is not well traced. The relation between the proportion
of outside directors, a proxy for board independence, and firm performance is mixed. Various
studies using financial statement data and Tobin’s Q find no link between board independence
and firm performance, while those using stock returns data find a positive link. Firms with
independent boards have higher returns on assets, higher profit margins and larger dividend
yields, Good corporate governance has been identified as a key bottleneck in strengthening
Microfinance Institutions’ financial performance. The owners-board relationship concerns how
well the board is aligned to owner interests, how well the board is informed, and how decisive
the board is (Black and Kim, 2003). The higher is the score on these dimensions of the board's
characteristics, the better is financial performance

1.2RESEARCH PROBLEM
The main challenge of micro finance is to create social benefits and promote financial inclusion
by providing financial services to low-income households. This is often referred to as the
"double-bottom line" of Microfinance Institutions. The increasing emphasis in recent years on
financial sustainability rather than on social mission has led to allegations of mission drift among
Microfinance Institutions. It is in this context that the issue of corporate governance of
Microfinance institutions becomes increasingly relevant. Microfinance practitioners have
recognized that good governance is critical for the success of the MFIs (Campion, 1998). Closer
examination of the role of various governance mechanisms is important because MFI managers
control significant resources. The microfinance community has experienced some major failures
because of inadequacies in its operation, including corporate governance (Labie, 2001). Given its
tremendous outreach in recent years, its future growth and financial sustainability depends on
how well it is governed and if these corporate governance mechanisms are not followed it will
result into collapse and closure of these Microfinance institutions. The recent waves of corporate
scandals in developed countries indicate that there is much room for improvement of governance
practices even in countries with well-functioning markets and in industries with established
mechanisms of control. Investigating corporate governance practices in microfinance institutions
is important because of the significant resources they leverage in regard to poverty alleviation.
Good corporate governance has been identified as a key bottleneck to strengthen the financial
performance of MFIs and increase outreach of microfinance Rock et al. (1998). The study is also
warranted by the scarcity of empirical research about developing strong governance structures
within MFIs that may improve their performance. Microfinance institutions must achieve a
balance between operating as a financial sustainable business and pursuing a mission of general
interest: reducing financial exclusion. Corporate governance is related to an institution's internal
operating and control procedures. It is important to an institution because it plays a key role in
creating transparency and trust for investors and in attracting capital for an institution. Good
corporate governance contributes to efficient management and to considering stakeholder
interests, boosting the microfinance institution's reputation and integrity and fostering customer
trust. Inefficiency in corporate governance standards for example limited board size, gender
diversity, inadequate formal procedures of financial reporting and others are the main challenges
facing the sector in Kenya and it may upset the fast growth and also lead to poor financial
performance of the microfinance institutions. As a result, various corporate governance reforms
have been specifically emphasized on appropriate changes to be made to the board of directors in
terms of its composition and size Even though many studies have been conducted to identify the
relationship between corporate governance practices and firm performance, there are limited
scholarly studies conducted for the microfinance industry in relation to corporate governance.
Kerubo (2011) focused on corporate governance practices in microfinance institutions and did
not focus on its impact on the financial performance of these institutions, Mbithe (2011) focused
on the effect of corporate governance on the financial performance of Deposit Taking
Microfinance institutions in Kenya and left out Non-Deposit Taking microfinance, and Ngure
(2007) conducted a survey of the relationship between corporate governance on the performance
of microfinance institutions in Kenya and the focus was organizational performance. Therefore
this necessitated the need to study the effect of Corporate Governance on the financial
performance of the microfinance industry as a whole given the tremendous growth of this
industry.

1.3 OBJECTIVES OF THE STUDY

The general objective of the study it to examine the effect of corporate governance on the

Financial performance of Microfinance Institutions in Kenya.

Specific Objectives

i. To determine how financial accountability affects growth and performance of

microfinance institutions in Kenya.
ii. To assess how financial sustainability affects growth and performance of microfinance
institutions in Kenya
iii. To determine how financial transparency affects the growth and performance of
microfinance institutions in Kenya.
iv. To establish the effect of board size on the financial performance of and growth of
microfinance institutions in Kenya.

1.4 RESEARCH QUESTIONS

I. How does financial accountability affect growth and performance of microfinance
institutions in Kenya?
II. To what extend does financial sustainability affect growth and performance of
microfinance institutions in Kenya?
III. In what way does financial transparency affect the growth and performance of
microfinance institutions in Kenya?
IV. Does the size of board and representation affect the level of growth and performance of
microfinance institutions in Kenya?

1.5 SIGNIFICANCE OF THE STUDY

To the policy makers including CBK it is within my interest that this evidence would offers
important quantitative information into the cauldron of policy. The finding can help CBK to
come with policy to protect investors and promote market growth. By helping to promote good
performance of the firm and the protection of interest of various stakeholders, corporate
governance encourages more investment and banking sector development.

To deposit taking microfinance bank the evidence of this work can help them to initiate good
corporate governance. Evidence have suggested that the level of firm corporate governance
provisions has more impact in those countries that have weak legal (or regulatory) requirements,
implying that companies can partly compensate for weak rules and regulations by establishing
effective corporate governance and provision of credible investor protection mechanisms. To the
board of directors of microfinance banks this study is intended to make the board more effective
and efficient in their activity that leads to the achievement of its objectives such as to deliver
value to the customers and returns to the shareholders‟ investment. The board may become more
aware of how its activities affect the return on shareholders‟ value. To the shareholders the study
is intended to sensitize them on the importance of ensuring that the board practice good
corporate governance for the sake of maximizing their share value. This helps them to
understand how the activities of the board determine the returns on their investments. To the
academicians it is hoped that this study will add to the existing body of empirical literature on
corporate governance in microfinance institutions in Kenya. Hence, the Study will contribute to
the existing body of knowledge on good corporate governance and also make some
recommendations which will arise from its findings which further research can be conducted or
other related areas of study.

1.6 SCOPE OF THE STUDY.

This study covered all the microfinance institutions registered under the AMFI; whether they are
compliant to CG guidelines or not. In terms of time, the study covered the period between 1999
(when AMFI was registered) and 2018.
CHAPTER TWO

LITERATURE REVIEW

2.1 INTRODUCTION
In this chapter the literature on corporate governance and financial performance is reviewed.
Literature review therefore refers to the analysis of the existing body of knowledge on a certain
line of study. Literature review focuses on the already existing studies which were done by other
researchers and scholars. These studies thus provide the researcher with some basic knowledge
of the topic under research.

2.2 THEORETICAL FRAMEWORK

Freeman (1984) defined a theory as a set of concepts that are interrelated, propositions

and definition which present a view of an issue through specifying the relations among

various variables with an aim of predicting that particular issue.

2.2.1 AGENCY THEORY

Agency theory by Berle and Means (1932) explored about the corporate revolution. They argued
that that at inception corporations are managed by the owners but as they grew, the founders
sought external expertise and support in terms management and finances. Consequently, due to
this support corporation became owned by external shareholders. This support demand for the
need to separate decision of founders (ownership) and managers (control). This separation of
management and ownership has also resulted in various types of interests between managers and
the shareholders. According to Jensen and Meckling (1976) the agency theory tries to identify
the agency relationship between the principal who delegates to another party which is the
agent.Managers who act as the agents might always fail act for the best interest of the owners
thereby resulting to an agency problem. This happens if the interests of ownership and
management as parties to this engagement are not aligned. The agency theory is concerned with
reducing the agency problem which will lead to increase value maximization by parties in this
engagement. To minimize agency problem and protect shareholder interests, Davis et al. (1997)
proposes two important mechanisms of governance that is the compensation schemes to align the
interests of both the agent and the principal and the board of director’s characteristics

2.2.2 STAKEHOLDER THEORY

This theory is anchored on the interest of stakeholders in a corporation. The theory underscores
the need for a corporation to balance the interests of all stakeholders Freeman,(1984). Freeman
said that the theory expands the scope of interested parties in the agency theory to factor all the
stakeholders i.e. the internal and the external. Thus the theory tries to bring together the various
interests of all stakeholders of the corporation, hence the name stakeholder theory by Freeman
(1984).Jensen (2001) advocates for stakeholder theory but did not specify how the necessary
trade off among competing stakeholder’s interests was to be made. He said the managers are left
to make decision for each stakeholder with no check; without a way to keep scores, thus this
theory makes managers not to be fully accountable in regards to their actions. It would seem
clear that this theory could be attractive to the manager and the directors for their own self
interests. Jensen proposed more value maximization of the stakeholders which he equates to
stakeholder theory. He stated that „more value maximization should utilize as much of the
stakeholder theory structure but still accepts that maximization of value of a firm in the long run
as the single criterion for making prerequisite tradeoffs among its various stakeholders

2.2.3 STEWARDSHIP THEORY

This theory also came after stakeholder theory. The proposition of the theory was to define a new
understanding of the relations between different parties within the organization and aims of the
establishment of the MFI. Proposed by Davis et al. in 1991, the theory defines a steward as any
person who maximizes and protects the wealth of the shareholders. In this instance, a steward
would be a senior manager in a MFI. The theory appears to be somewhat opposite to the agency
theory which views managers as individualistic and moved by self-interest. On the contrary, the
stewardship theory views managers as people who are responsible and acting on good faith all
the time. In order to avoid CG problems, stewardship theory suggests that managers be
considered as more important than previously thought. As a result, they are supposed to be
highly remunerated and offered shares (Ongore & K’Obonyo, 2011). This way,they are able to
feel ownership of the organization hence govern it as if they are the owners. In
the end, the agency costs are reduced, and possibility of CG scandals amongst MFIs reduced.

2.3 DETERMINANTS OF FINANCIAL PERFORMANCE

The corporate governance cost can be defined as a measure of firm’s managerial Performance,
based on the fact that institutionalization of corporate governance measures is likely to lead to
good decisions that give results to improved firm performance. Higher Director remuneration is
seen as an incentive for the directors to act in the very best interests of all stakeholders as a
means of retaining their jobs and continuing to access these benefits, and especially if these
benefits represents a bigger component in relation to their total wealth portfolio. Thus, the higher
director benefits are expected to lead to Lower agency costs. Also, engaging compliance and
external auditors, in efforts to enforce governance will force manager to act in manner that would
increase firm value.

Njuguna (2013) found out that MFBs financial performance could be determined to capital
invested and injected to the institutions. It was found that increase in capital invested in leadto
improved performance of the MFBs as which is measured by return on assets (ROA). Poor
economic conditions can worsen the capital adequacy of the MFBs and thereby quality ofloan
portfolio, thereby reducing profitability

2.3.1 BOARD SIZE

The board size has an influence on firm performance. There are various arguments in Favor of
smaller board size to deal with the agency problem. Yermack (1996) argues that large boards are
slow in decision making, and thus can be a challenge to change. Further, small board size rarely
criticizes the decision of top management, a problem that tends to vary with the board members
number Yermack (1996)

Maranga (2014) investigated the corporate governance affects the financial performance of
Small and Medium Enterprises in County of Nairobi, Kenya. The study found that there is a
significant strong relationship between the SMEs financial performance and board size. The
number of board sub committees, number of board meetings, and the size/age of the SMEs were
found to significantly affect the financial performance of SMEs in a positive direction.
2.3.2 FINANCIAL SUSTAINABILITY
This study investigates the relationship between corporate sustainability and firm financial
performance. Firms are facing new business challenges as the ideology is shifting from
shareholder maximization to satisfy the needs of multiple stakeholders. Therefore, sustainability
practices should be included in business strategy to achieve financial competitive advantages as
well. Furthermore, prior literature suggests that board of directors have an important role on firm
success. Thus, one board component, gender diversity, is included in the empirical analysis. The
findings are that there is a significant positive relationship between corporate sustainability
performance and profitability, as measured by ROA and ROE.

2.3.3 FINANCIAL ACCOUNTABILITY

According to Lee and Ali (2008) there is a strong relationship between financial accountability
and financial performance. This is because financial accountability improves financial
performance; the goal of financial accountability is to improve performance, not to place blame
and deliver punishments. According to Moyes et al., (2006), financial reports must exhibit
certain qualities that make them useful to the stakeholders and these include relevance,
reliability, understandability and timeliness. Australian Accounting Research Foundation (1990)
stated that it is important for financial reports to be relevant. They must have value in terms in
making and evaluating decisions about the allocation of scarce resources and in assessing the
rendering of accountability by the providers. The reports must also be reliable because users use
them for decision making. Reliability means that information is reasonably free from error and
bias and faithfully represents what it purports to represent. Understandability is the ability of
users to understand the financial reports

2.3.4 FINANCIAL TRANSPARENCY

Theoretical studies suggest that increased transparency reduces a firm's cost of capital (Diamond
& Verrocchio, 1991). Thus, more transparency should improve financial performance. We
examine the relation between firm transparency and bank holding company (BHC) profit
efficiency using the number of analysts following a BHC and the standard deviation of analysts'
EPS forecasts to measure transparency. Our hypothesis is that more transparent BHCs are better
managed, causing a positive relation between transparency and profit efficiency. The empirical
results confirm that transparency has a positive effect on profit efficiency.

2.4 EMPIRICAL STUDY

This section presents results of real studies which were carried out in several parts of the world.
The aim is to check whether there exists any relationship between CG and the growth of MFIs in
Kenya and other parts as well. The microfinance industry growth (MIG) behaves differently
under different CG practices, literature shows (Korir & Cheruiyot, 2014; Kang et al. 2012,
Ongore & K’Obonyo, 2011; Servin et al., 2012). Overall, there are mixed results regarding the
effect of CG practices of MFIs on the industry growth. Some show positive effects, others
negative, yet others neutral. Nevertheless, as Kang et al. (2012), most studies found a positive
relationship between CG and MIG. It is essential however, to understand something about MFIs.
Since they pursue both social and economic goals, organizational performance becomes difficult
to measure. According to Mersland and Storm (2010), it is indeed difficult to measure the social
performance of MFIs. This raises questions to studies which found out some form of relationship
between CG and MIG; whether they took into account all the factors that make it difficult to
measure performance of MFIs hence the relationship of CG and industry growth (industry
growth is literally assumed to be the cumulated performance of individual MFIs).

Despite the above challenge, empirical research has been done on the small-scale relationship
between CG and MIG. Mersland (2007) found out that efficient CG practices International
Journal of Economics, Commerce and Management, United Kingdom Licensed under Creative
Common Page 315 improved the social and financial goals of the MFIs. The other relationship
between CG and MIG has been explored by Mersland & Strøm (2012). They contend that
favorable CG practices reduce agency costs, increased returns and higher valuation for the
company. Elsewhere, Haq et al. (2010) refute assertions that board characteristics had any effect
on performance and growth. According to them, only board remuneration and the presence of
audit board committees improves the performance of MFIs. Additionally, Mersland & Strøm’s
(2009) Chinese study did not bring out any relationship between how financial institutions with
MFI departments performed and how they were managed or directed
2.5 CONCEPTUAL FRAMEWORK
The conceptual framework is created to demonstrate relationships between the corporate
governance and financial performance in micro finance banks (MFB). Financial performance is
the dependent variable. The independent variable are financial; transparency, sustainability,
accountability and the size of the board of the firm.

Fig2.5 Conceptual Framework

Financial Financial
sustainability
performance of micro
finance banks
Financial
transparency

Financial
accountability

The board size of the

firm

Independent variables dependent variable

SOURCE; RESEARCHER (2019)

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 INTRODUCTION
Research is concerned with how the problem is defined, how possible solutions are formulated
how data is collected and organized and methods of evaluating it. The research methodology is
an operational framework that is used to empirically solve research problem. This chapter clearly
outlines the general methodology that was used to conduct this study. The steps that were
followed include specifying research design, identifying the target population, data collection
procedure and instruments, data analysis and how to interpret it.

3.2 RESEARCH DESIGN

. A research design therefore is a plan, structure and a strategy which is conceived in order to
obtain answers to the question under research Cooper and Emory (1995). It provides a
framework for planning and conducting study. The research design therefore captures both the
structure of the research problem and the plan of investigation which is to be used to obtain
empirical evidence on relations of the problem Cooper & Schindler (2003). This study used a
descriptive research design. Descriptive design was preferred because the study used quantitative
statistical data to describe the corporate structure mechanisms and performance of the
microfinance banks in Kenya as they exist at the time of carrying this research.

3.3 TARGET POPULATION OF THE STUDY

The study population is the full set of cases from which a sample is taken. Cooper and Emory
(1995) defined population of the study as collection of elements which the study wishes to make
inferences from which are subject that measurement are to be taken from. The target population
of interest in this study consists of all 9 microfinance banks in Kenya.
3.4 SAMPLING DESIGN
Sampling design can be defined as the determination of the number of people to interview, the
number of events to observe or the number of records to inspect. The sample size is the part of
the target population that was selected by the researcher for the purpose of data collection. The
study adopted multistage sampling design. Since the Population of study was few there was no
need of sampling and therefore the study focused on all 9 microfinance banks. Hence, the study
sample was 9 banks, and one can conclude that census sampling was used.

3.5 DATA COLLECTION METHODS

Data collection involves gathering of empirical evidence so as to gain new insights about a
certain situation and try to answer questions that prompted undertaking of the research. The
study has used secondary data in order to analysis the relationship between financial
performance and corporate governance. Secondary data was obtained from financial statements
of the 9 microfinance banks also published by CBK. These statistics were for the period 2015 to
2019. A data collection guide was prepared to guide data gathering

Secondary data sources are to be used because the research is a typically quantitative study and
data shall be obtained from the Annual reports which were sourced from Association of
microfinance Kenya annual report .The data collected consisted of gender of the board, board
size, independent directors, CEO duality and return on assets. The data covered a period of four
years ranging from the year 2009 to 2012. A secondary data collection sheet was used to collect
the required data

Variables used in the study and their respective measurement

Variable Measurement

Return on Assets (ROA) - Net income before donations / Average assets

Board Diversity- Measured in terms of gender diversity and specifically the percentage of
women directors to the total members in the board.

Board size -Total number of members in the board

Board Independence- Percentage of external members to the total members in the board.

CEO Duality -Yes=1 , No=0

3.5.1 RELIABILITY AND VALIDITY

Colin, (2005) defines reliability as the degree to which an assessment tool produces stable and
Consistent results. The pre-test will be used to determine reliability in the questionnaire. The
developed questionnaires will be given to a few subjects who are excluded from the study. This
will be repeated and comparison between the results will be made.

Validity is defined as to how well a test measures what it is purported to measure Cozby,
(2001).Validation of the data collection instruments will get fellow students involved i.e. Have
the students look over the assessment for troublesome wording, or other difficulties and I will
also compare my measure with other measures or data that may be available.

3.6 DATA ANALYSIS

In order to establish the effect of corporate governance on the financial performance of MFIs as
the overall objective, the study used regression analysis. The various governance Practices about
board independence, board size, board diversity and CEO duality were Analyzed using
descriptive statistics particularly the mean, median, standard deviationand inferential statistics;
correlation and multiple regression. The SPSS version 16Statistical packages were used to
analyze the data.

3.6.1 ANALYTICAL MODEL

Regression analysis was used to establish the relationship between corporate governance

and financial performance of MFIs. The representation of the model is given in the

equation below:

The general representation of the equation above is as follows:

Y = β0 + β1X1 + β2X2 + β3X3 + β4X4 + εt

Where:

Y = Financial Performance determined by return on assets (ROA);

β0 = Constant;

β1 - β5= regression coefficients;

X1=Financial sustainability

X2=Board size;

X3=Financial accountability

X4=Financial transparency

εt = Error term;

3.6.2 TEST OF SIGNIFICANCE

T-tests can be used to determine whether there is a significant difference between two sets of
means. Therefore t-tests using SPSS statistical program would be employed in this study.
Conducting the t-tests requires that the normality of the data is not violated. The P-values of
results of the multiple regression analysis shall be used to test for significance of the relationship
between variables. The significance level to be used shall be 0.05 (5%)to test for significance
where any P-value of less than 0.05 shall indicate a significant relationship.

3.7 LOGISTICS AND ETHICAL CONSIDERATIONS

This protects all participants from potential harm.

An introductory letter and research authorization letters for actual data collection will be sought
from the school and the department from the University. The researcher will furthermore seek
the subjects consent to participate in the study and assurance of safety and confidentiality of their
information given. The goal and objectives of the study will be for educational purposes only
which will clearly be explained to the authorities and staff to enhance clarity. The right to
withdraw in the study will also be guaranteed
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APPENDICES

Annex I: List of Microfinance Bank in Kenya

Microfinance Banks Registration Date

Kenya Women Microfinance Bank Ltd April 2010

Faulu Microfinance Bank Ltd May 2009

Rafiki Microfinance Bank Ltd June 2011

SMEP Microfinance Bank Ltd December 2010

REMU Microfinance Bank Ltd December 2010

Century Microfinance Bank Ltd September 2012

Sumac Microfinance Bank Ltd October 2012

Uwezo Microfinance Bank Ltd November 2010

Source: Central Bank Kenya, Bank Supervision Annual Report, 2015,

APPENDICES 2.QUESTIONARE.

Section 1: Socio-demographic Information

1. Age … (indicate complete years)

2. Gender

Male 1……….. Female 2………………

3. Religion

Christian 1 ………….Muslim 2 ……………Hindu 3 ………..Non-Religious 4

Other 4 (specify)

…………………...
4. Level of education

Secondary 1…………… College 2………….. University 3 ……………Other 4

(Specify) ………………………

5. Work experience

[0-3 months] 1…………… [4-6 months] 2……………. [7-12 months] 3 …………..[1-3 years]
4…………[over 3 years] 4

Section 2A. Challenges faced by microfinance institutions

1. Do you use data in decision making within the institution?

Yes 1 ………….. No 2……………..

2. What are some of the challenges in the data driven decision making among the institution?

Poor data accessibility 1 ……….Poor data quality 2 ………….3 Bad data user attitude

……… 4 Other..(Specify) …….

3. Does the stakeholders in the banking sector offer support for data

Collection, analysis, interpretation, and use?

Yes 1 …………………No 2

4. If yes in question 4, above what type of support is offered?

Encouragement to use data 1 …………….Team work in collection 2

Teamwork in data analysis 3 …………………….Support in interpretation of the data 4

5 …other……………(specify)

……………………………………

5. Are there barriers to institutional growth in microfinance sector?

Yes 1 ………………………No 2

6. If yes in question 5 above, what are some of the barriers? Specify……………………

Section 2B. Level of Awareness in micro finance institutions

1. Are you aware of the different types of strategies that could be used to improve corporate
governance?

Yes 1………………… No 2………………………

2. If Yes in question 1 above, what are some of the effective strategies you have used ?

Strategic data use 1…………………………… Planning for more resources 2

Other 3 (specify) ………….

3. Are you knowledgeable of issues that result to data misuse and mismanagement?

Yes 1……………. No 2…………..

4. What are some of the issues that lead to failure of corporate governance?

………………………………………………………………………………………………………

5. Are you aware of office abuse within the microfinance set up sector?

Yes 1………………. No 2……………………

6. Do you consider yourself data literate when it comes it its application in managing
microfinance instituitons?