Abstract Dynamic load is one of the significant factor affecting the stability of hybrid microgrid (MG), owing to their frequency and voltage dependency. As compared with the static load, a small variation in voltage or frequency significantly influences the stability of MG having dynamic load. Therefore, it necessitates considering the dynamics of load for stability analysis of an MG. Moreover, the stability issues become more critical for the islanded operation. This paper investigates the small signal (SS) stability of a hybrid MG utilizing composite load model (CLM) to include the load dynamics. This paper also investigates the critical universal droop control parameters and other internal controller parameters that influence MG stability. Eigenvalue analysis is used to identify the respective stability domain of different control parameters. The effectiveness of the proposed approach is tested by comparing the dynamics of CLM with constant power and impedance load. In addition, a memetic algorithm and SQP-GS is used to find the optimal values of different key parameters. The simulation results confirmed the effectiveness of the proposed SS dynamic model of hybrid MG and the efficacy of the optimization algorithm for tuning control parameters, which improved the dynamic performance of the hybrid MG.