SCHOOL OF BUSINESS ADMINISTRATION

MASTER OF BUSINESS ADMINISTRATION IN

ASSIGNMENT ONE

BUSINESS RESEARCH METHODS

UNIT CODE:

NAME: FRANKLIN MUTEGI NDWIGA

REG:19/06928

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THE EFFECT OF CORPORATE GOVERNANCE ON FINANCIAL PERFORMANCE
OF LARGE TIER SAVINGS AND CREDIT COOPERATIVE SOCIETIES IN KENYA

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE

JUNE, 2023

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 TABLE OF CONTENTS
ABSTRACT...................................................................................................................................ii

CHAPTER ONE............................................................................................................................1

INTRODUCTION.........................................................................................................................1

1.1 Background of the Study...........................................................................................................1

1.1.1 Corporate Governance............................................................................................................2

1.1.2. Financial Performance...........................................................................................................3

1.1.3 Savings and Credit Cooperative Society in Kenya.................................................................3

1.2 Statement of the Problem...........................................................................................................4

1.3 Objectives of the Study..............................................................................................................5

1.3.1 General Objective...................................................................................................................5

1.3.2 Specific Objectives.................................................................................................................5

1.4 Research Questions....................................................................................................................6

1.5 Significance of the Study...........................................................................................................6

1.5.1 Managers and Directors..........................................................................................................6

1.5.2 Policymaker............................................................................................................................6

1.5.3 Researchers and scholars........................................................................................................6

1.6 Justification of the Study...........................................................................................................7

1.7 Scope of the Study.....................................................................................................................7

REFERENCES................................................................................................................................8

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 ABSTRACT
Corporate governance entails accountability, transparency and credibility, as well as being able
to put in place effective channels that can disclosure information in a manner that will foster
good corporate performance. Corporate governance takes place within the firm and mostly
depends on the firm’s shareholders, the board of management and the company executives its
successful realization. This study will seek t to answer the question of what is the effect of
corporate governance on financial performance of SACCOs in Kenya. This research will employ
a descriptive research design and the 15-large tier deposit taking SACCO’s in Kenya made up
the study population.

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 CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Corporate governance entails accountability, transparency and credibility, as well as being able

to put in place effective channels that can disclosure information in a manner that will foster

good corporate performance (Gadi & Yakubu, 2018). All firms especially the commercial ones,

not for profit making firms and corporate bodies are all concerned about good corporate

governance and its importance (Melkamu, 2019). Good corporate governance is crucial to all

firms or institutions regardless of industry, firm’s growth level or even the firm’s size (Mwangi

& Cheruyoit, 2018). Corporate governance ensures that the interest of all stakeholders in a firm

is cater for, be it the investors or the firm’s clients. It also ensures that the investor’s main

interest which is profit maximization is taken care of. Stable mechanism of corporate governance

is vital since it ensures that the firm’s worth is not tempered with. It focuses on increasing the

firm’s worthiness (Haider & Iqbal, 2018).

Theoretically, the agency theory suggests that corporate governance is mainly meant to protect

the shareholders interest in a firm. That is to ensure that managers work towards maximization of

owner’s wealth. It also safeguards against misuse of firm’s resources for selfish interests of

managers and firm’s employees in general (Melkamu, 2019). The resource dependency theory

supports that business performance can be evaluated by the effectiveness of the network and

communication between parties privy the contract of firms (Afza & Nazir, 2020). The

stakeholder theory supports that the corporate governance should be able to recognize the

importance and the rights and the needs of the firm’s

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Savings and Credit Cooperative Societies are critical avenues for economic growth for both

develop and developing countries are the globe (Amenya & Ombui, 2021). SACCOs are a

crucial source of financing for firms mostly in developing countries in the world. Saccos’ are

actively involved in financial intermediation activities, particularly mediating be lower income

savers and borrowers (Karagu & Okibo, 2022). Thus, a better performance of the SACCO

business as far as financial is concerned is crucial for SACCO survival. Successful performance

in the SACCO as far as financial is concerned has a positive relation with the capacity to

effectively manage financial issues. The SACCO business, thrive on confidence and trust of

savers or depositors of fund and borrowers of funds, same like banks hence the need of an

effective corporate governance is vital (Oluoch, 2016).

1.1.1 Corporate Governance

Corporate governance refers to a situation where the firm’s management is encouraged to adopt

the stakeholders’ goals and objective, which is usually wealth maximization (Tosuni, 2018).

Corporate governance also refers to a process where the firm’s management are directed,

controlled and held responsible for their action or decisions within the firm. Corporate

governance involves a corporation of accountability, authority, direction, stewardship and

control. Corporate governance has a big spectrum which incorporates a combination of

regulations, rules as well as laws that enable a firm not only for efficient performance but also to

attract capital to attract capital, income generation (Shafi, 2017).

Corporate governance deals with resolution or reconciliation of numerous action difficulties that

may exist between firms’ stakeholders (Becht & Röell, 2018). The corporate governance

structure addresses duties and rights among different parties within the firm. The Corporate

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Governance has one major goal, which is to ensure safety and wellbeing of the firms’

stakeholders. Good corporate governance involves competitiveness of the firm within a society.

It also crucial since it ensures that a firm achieves its objectives and goals as well as attracting

investors. It emphasizes on efficient use of resources as well as preserving the environment and

being socially responsible (Wanyoike, 2018).

The major dimensions of corporate governance include an effective board of directors,

reasonable board size, CEO duality, efficient market, board diversity, government and regulatory

authority (Anyanga, 2017). According to Bonazzi and Sardar (2017), part-time directors have

been more resourceful in monitoring the firm’s managers as well as in ensuring protection of

shareholders’ interests. The size of the board also influences its ability to oversee corporate

governance. A small board is assumed to be more effective as compared to larger boards in

carrying out governance and oversight related responsibilities. Duality is a situation where the

CEO doubles up as the Chair of the board (COB). Board independence specifies that all

members of audit committee board must be outsiders, that is, those directors who are not

involved on the daily activities of the firm (Ness & Kang, 2020).

1.1.2. Financial Performance

Financial performance is the extent to which the business’s financial goals and objectives are met

or achieved. Financial performance refers to how effective a firm uses its resources especially

the assets to generate revenue in its daily business. It is a measure of organization’s financial

strength (Kiaritha, 2015). Performance of a firm is a more subjective evaluation on how effective

an organization uses its resources especially the assets to generate income. It’s also an appraisal

of the firm’s financial strength at a given time and can easily be used for comparison purposes

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for firms within the industry or the sector (Ene & Bello, 2016). Financial performance is a vital

measure of the firm’s management especially for-profit making firms. It’s essential, since it’s

based on the outcome achieved by the management of the firm (Hansen & Mowen, 2015)

Financial performance is a vital measure of what the firm’s management has achieved over a

given period both individually and collectively (Hansen & Mowen, 2005). Financial

performance of companies is an important measure in both financial and economy world

especially in capital markets. Shareholders of a well performing firm in terms of financially are

rewarded for their investment; as such the shareholders are able to increase their investment

which in turn brings about economic growth. Poor financial performance can lead to institutional

crisis and failure; this has a negative effect on economic growth (Okumu & Oyugi, 2016).

Performance measurement is vital as far as effective management of a firm is concerned. The

major ratios of financial performance measurement includeReturn on Equity, Earnings per Share,

Return on Assets, Tobin-Q, Profit Margin among others (Al-Matari & Fadzil, 2019).

1.1.3 Savings and Credit Cooperative Society in Kenya

A Savings and credit cooperative society (SACCO) is considered to be a co-operative society,

with an aim of encouraging its members to save, in this way are accruing capital, which can then

be lent to members at an affordable rate of interest (Makhokha, 2018). SACCOs are community

association predicated on monetary institutions possessed by their members in promoting the

economic status of members (Cheruiyot, Kimeli & Ogendo, 2017). SACCOs are categorized by

numerous aims and are hence different in their not only structural forms as well as profit seeking

behavior (Wanyoike, 2013). SACCOs are predicated on seven principles: community concern,

cooperation amongst cooperatives, training as well as information, education, independence and

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autonomy, democratic member control, member economic participation, voluntary and open

membership (Tsuma et al., 2015).

The SACCO movement is part and parcel of the cooperative societies in Kenya, that has changed

the lives of several people in Kenya (Oluoch, 2016). Most Sacco’s in Kenya have registered a

high growth and since 1970s and a number of SACCOs have attained the average growth rate of

twenty-five percent annually in assets and deposits. SACCOS have up surged and presently have

about 3.7 million members (Cheruiyot & Ogendo, 2012). By 2013 December there were over

6,000 listed non-deposit taking Saccos in Kenya, 1,995 of which were operational (Oluoch,

2016). SACCOs in Kenya are have adopted corporate governance mechanism due to the the

rapid changes in the business environment and regulations (Kiaritha, 2015).

1.2 Statement of the Problem

Corporate governance takes place within the firm and mostly depends on the firm’s shareholders,

the board of management and the company executives its successful realization (Shafi, 2021).

The structure of corporate governance normally encompasses components of business practices,

voluntary commitments, regulation and legislation that are the outcome of a nation’s specific

situations, tradition and history. Thus, the effective voluntary standards, self-regulation,

legislation as well as regulation vary from one nation to the other (OECD, 2022). Many

mechanisms of governance have been advanced comprising supervision by regulatory entities,

executive compensation, proper market compensation as well as market for corporate regulation.

However, developing an optimal corporate governance mechanism remains a major concern

(Bonazzi & Sardar, 2017). Additionally, corporate governance is quite complicated in SACCOs

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administration structures because of their autonomous principle for decision-making (Odera,

2018).

The connection between company governance and company performance has been extensively

studied in different industries and countries across the world. In their study Buallay and Zureigat

(2017) examined corporate governance effects on performance of quoted companies in Saudi

stock exchange and found an insignificant effect between firm performance and corporate

governance mechanism however, the study focused on listed firms. Ahmed and Hamdan (2015)

examined corporate governance effects on corporate performance in Bahrain Stock Exchange

and observed that corporate governance practices significantly affect firms’ financial

performance. The studies by Buallay and Zureigat (2017) and Ahmed and Hamdan (2015) and

many other across the world focus more on listed firms and commercial banks.

Kigotho (2014) in Kenya studied financial performance and corporate governance of the 62

firms registered at the NSE and found a direct effect between corporate governance and

performance of firms however the study focus was quoted firms. Mwangi (2013) also researched

corporate governance effects on profitability of listed companies and concluded that a strong

connection exists between profitability and corporate governance but the focus was also listed

firms in Kenya. In addition, despite the abundance of past studies on corporate governance and

performance of firms most studies focus more on firms listed at the NSE as opposed to

SACCO’S hence their findings may not be applicable to Sacco’s since practices of corporate

governance vary across countries and industries because of structures ownership, competitive

conditions and business. Therefore, the study will seek to gap by analyzing the effect of

corporate governance on financial performance of large tier SACCOs in Kenya

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1.3 Objectives of the Study

1.3.1 General Objective

The general objective of the study will be to analyze the effect of corporate governance on

financial performance of large tier SACCOs in Kenya

1.3.2 Specific Objectives

The study will be guided by the following specific objectives: -

i. To determine the effect of liquidity management on financial performance of large tier

SACCOs in Kenya

ii. To assess the effect of capital adequacy on financial performance of large tier SACCOs

in Kenya

iii. To examine the effect of size of the firm on financial performance of large tier SACCOs

in Kenya

1.4 Research Questions

The study will seek to answer the following research questions: -

i. To what extent does liquidity management affect financial performance of large tier

SACCOs in Kenya?

ii. What is the effect of capital adequacy on financial performance of large tier SACCOs in

Kenya?

iii. What is the effect of size of the firm on financial performance of large tier SACCOs in

Kenya?

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1.5 Significance of the Study

1.5.1 Managers and Directors

The results of this research will be of significance to managers and directors of Savings and

Credit Cooperative Societies (SACCOs) as they may use the findings of the study improve the

various corporate governance mechanisms in their institutions. The management of Sacco’s can

also use the findings to develop strategic policies and plan to enhance corporate governance in

their institutions.

1.5.2 Policymaker

The findings of the study will be of significance to policy and regulatory authorities like the

Sacco Societies Regulatory Authority (SASRA) who may use the findings to develop and initiate

strategic policies on corporate governance of SACCOs in Kenya. Finally, scholars and other

academic researchers may use their findings as a basis for additional research.

1.5.3 Researchers and scholars

Researchers and scholars alike can also use the report as a point of reference and as a source of

secondary data for future research related to virtual learning. Developers of virtual Learning

environments could use the results of this report to evaluate lecturers concerns and preferences at

university level to inform the development of their products and technologies offering.

1.6 Justification of the Study

This study will be guided by the following assumptions; that the selected sample would represent

the population in all the variables of interest and that respondents would willing to give the

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information freely without fear. It also will justify that all the questionnaires will be returned on

time and that those to be interviewed was available and willing to participate and provide honest,

accurate, complete answers, and that the researcher had adequate time to complete the study

1.7 Scope of the Study

The scope of the study will be examining the effect of corporate governance on financial

performance of large tier SACCOs in Kenya. The study will be based on large tier SACCOs

where by the management will be targeted in the study. This research will employ a descriptive

research design and the 15-large tier deposit taking Sacco’s in Kenya made up the study

population. The study will take a period of three months

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