Corporate Governance, Firm Age And Financial Stability Of Microfinance Banks In Kenya

Abstract

Financial stability has remained a major challenge of the microfinance banks in Kenya. Statistics from the Central Bank of Kenya show that for the period 2018-2022, the aggregate net incomes of these institutions have been negative with return on equity (ROE) and asset (ROA) values averaging at 13.24% and -1.55% respectively. This implies that these institutions have been posting losses hence providing a pointer of concern about their financial stability. The instability of these microfinance banks is detrimental to the survival of the entire financial sector and the economy at large. The general objective of the study was to establish the effect of firm age on corporate governance and financial stability of microfinance Banks in Kenya. The following specific objectives guided the proposed study. To establish the relationship between board independence and financial stability of microfinance banks in Kenya; to determine relationship between ownership concentration and financial stability of microfinance banks in Kenya; to analyze the relationship between CEO compensation and financial stability of microfinance banks in Kenya and to assess the moderating effect of firm age on the relationship between corporate governance and financial stability of microfinance banks in Kenya. The agency theory, stewardship theory, the theory of growth of the firm as well as resource based view provided anchorage to the study. This study adopted explanatory design to meet the formulated objectives. The target population comprised of 12 Microfinance banks licensed by CBK and census was adopted, Secondary data was gathered in this study with the aid of the questionnaire that was in structured format. The analysis was done through panel data and findings presented through tables. It was established that board independence had p-value of p=0.016 i.e. p<0.05, ownership concentration had p-0.015<0.05 and CEO compensation had p= 0.028<0.05 hence all of them were significant. It was concluded that corporate governance significantly affects financial stability. The study recommended that shareholders and policy makers at the Central Bank of Kenya should balance between independent and non-independent director among microfinance banks in Kenya. Shareholder working with MFIs in Kenya should restructure their shareholding structures and composition so as to balance the interests of shareholders. Shareholders of microfinance banks should provide competitive remuneration package to the CEO which should be tied to their performance.