FINANCIAL GOVERNANCE AND ABSORPTION EFFICIENCY OF AID FUNDS UNDER THE KENYA DEVOLUTION SUPPORT PROGRAMME
Kanini Fredrick Mwangi - Postgraduate Student, Department of Accounting and Finance, School of Business Economics and Tourism, Kenyatta University, Kenya
Dr. Francis Gitagia (Ph.D, CPA) - Lecturer, Department of Accounting and Finance, School of Business Economics and Tourism, Kenyatta University, Kenya
ABSTRACT
The Kenya Devolution Support Programme (KDSP) is a key financing framework established to strengthen financial governance and improve service delivery within Kenya’s devolved system of government. Despite its importance, the absorption efficiency of aid funds under the programme has remained inconsistent, with utilization rates frequently falling below 65 percent between 2019 and 2024, raising concerns regarding effective implementation and accountability. The purpose of this study was to examine the effect of financial governance on the absorption efficiency of aid funds under the Kenya Devolution Support Programme in Kenya. Specifically, the study sought to examine the effect of financial reporting transparency, external audit compliance, internal financial control strength, and financial reporting compliance on absorption efficiency of aid funds. The study was anchored on Financial Sustainability Theory, Agency Theory, Stewardship Theory, Internal Control Theory, and Institutional Theory. A census design was adopted covering all 47 county governments in Kenya. The study relied on secondary data obtained from the Office of the Auditor-General, the Office of the Controller of Budget, and other official government publications for the period 2019 to 2024. Data analysis was conducted using descriptive statistics, diagnostic tests, correlation analysis, and fixed effects panel regression analysis. The findings established that financial reporting transparency had a positive and statistically significant effect on absorption efficiency of aid funds (β = 0.0318, p < 0.05). External audit compliance also had a positive and statistically significant effect (β = 0.0185, p < 0.05), while internal financial control strength (β = 0.0016, p < 0.05) and financial reporting compliance (β = 0.0013, p < 0.05) likewise exhibited positive and statistically significant effects on absorption efficiency. The study concluded that strengthening financial governance enhances the efficient absorption of aid funds under the Kenya Devolution Support Programme. It recommends that county governments improve transparency in financial reporting, strengthen implementation of external audit recommendations, reinforce internal financial control systems, and enhance compliance with financial reporting requirements. In addition, oversight institutions, including the National Treasury, the Office of the Controller of Budget, and the Office of the Auditor-General, should intensify monitoring and capacity-building initiatives to promote effective utilization of development resources within county governments.