Effect Of Corporate Governance On Fraud Mitigation Among Microfinance Banks In Kenya

Abstract

iii ABSTRACT Microfinance banks in Kenya play a critical role in providing financial services to low- income individuals and small businesses, many of whom are underserved by traditional financial institutions. However, like any financial institution, microfinance banks in Kenya are also susceptible to fraud, which can have significant consequences for both the institution and its clients. The main aim of this research study was to assess the effect of corporate governance on fraud mitigation among microfinance banks in Kenya. The specific objectives of the study were to; determine the effect of executive compensation on fraud mitigation, analyse the effect of board independence on fraud mitigation, to establish the effect of independent risk committee on fraud mitigation and to assess the effect of code of conduct on fraud mitigation. The research adopted the agency theory, stakeholder theory and the stewardship theory. A descriptive research design was used in this research. The target population was the 349 management employees working at the 14 microfinance banks in Kenya and stratified sampling technique was used. The employees were classified according to their cadre. The sample size was 186 arrived at using Yamane formula. The study utilized primary data that was collected using a questionnaire. The administration of the questionnaire was done through Google form. The collected data was converted into quantitative format and analysed using descriptive and inferential statistics. The descriptive statistics involved mean and standard deviation while inferential statistics comprised of both correlation and regression analysis. The results of the study were presented in tables and figures followed with pertinent interpretation. Regression results revealed that executive compensation, board independence, independent risk committee, and code of conduct together account for 93.1% of the variation in the fraud mitigation among microfinance banks in Kenya. The explanatory power of the model was statistically significant as the p value was 0.000. Further the results revealed that executive compensation (β = 0.312, p = 0.000); board independence (β = 0.352, p = 0.000); independent risk committee (β = 0.232, p = 0.000); and code of conduct (β = 0.732, p = 0.000) had a positive and significant effect on fraud mitigation among microfinance banks in Kenya. Based on the findings, the study concluded that effective corporate governance, manifested through equitable executive compensation, autonomous and diverse boards, proficient and independent risk committees, and robust codes of conduct, substantially contributes to fraud mitigation in microfinance banks. The recommendations emphasize the refinement of corporate governance structures and practices, continuous monitoring and evaluation of governance policies, and the integration of advanced technological solutions to enhance fraud detection and prevention capabilities. Future research is encouraged to explore the intricate relationships between different corporate governance components and their collective impact on fraud mitigation, with a focus on uncovering universally applicable insights and practices in varied organizational and geographical contexts.