Adoption of Corporate Governance Practices and Their Effect on Financial Performance of Savings and Credit Co-operative Societies in Nyandarua County, Kenya

Abstract

 Corporate Governance Practice is a management tool that was introduced by Nairobi Securities Exchange (NSE) through the Capital Markets Authority (CMA) as statutory requirement for companies listed at NSE to improve their financial performance. Though corporate governance practices have been enforced in Kenya, it has in equal measure experienced cases of mismanagement of Savings and Credit Co-Operative Societies (SACCOs) that has led to collapse of a number of them and others have experienced liquidity challenges. A case in point was the mismanagement of the giant Harambee SACCO which put management of SACCOs on the spotlight. Despite several studies on Corporate Governance Practices, it is not clear how insider lending, an aspect of corporate governance, affected the financial performance of SACCOs. The study examined effect of adoption of corporate governance practices, aforementioned, on financial performance of SACCOs. Three theories guided the study, namely; Agency, Stewardship and Stakeholder theories. The study adopted descriptive research design that involved set of methods and procedures that described intended variables and how they relate to each other. The study adopted Israel, (1992) formula to sample 53 from the population of 61 SACCOs registered with the County Co-operatives Officer in Nyandarua County, and thereafter, from the 53 sampled SACCOs, two top managers were sampled. This led to a sample of 106 respondents. Primary data was collected using a structured questionnaire whereas; secondary data was collected through documentary analysis. Data was analysed using descriptive and inferential statistics and results presented in form of tables and charts. Of the 106 distributed questionnaires, 100 were duly filled and returned and therefore the response rate was 94.3%. The R square was equal to 0.778 while the adjusted R square value was 0.770 which means that 77.0% of the corresponding variation in financial performance of the SACCOs can be explained by corporate governance practices employed by the SACCOs. Multiple regression analysis indicated that insider lending had a great effect on financial performance of SACCOs with a coefficient of -0.391 while the appointment of internal auditor with a coefficient of 0.243. The variable on insider lending had a negative coefficient implying that a unit increase in insider lending led to a decrease in financial performance of the SACCOs by 0.391 units. The variables were all significant at p=0.000 and p=0.013 for the constant term. The study therefore fails to accept the null hypothesis that corporate governance practices have no statistically significant effect on the financial performance of SACCOs in Nyandarua County and states that corporate governance practices.