Influence of Corporate Governance Practice on Financial Distress Among Commercial Banks in Kenya

Abstract

Over the past decade, banks have experienced financial distress challenges due to internal and external forces. Corporate governance aspects, competition, globalization and influence of information technology have contributed to deteriorating financial performance among commercial banks in Kenya. This study aimed at establishing the influence of corporate governance on financial distress among commercial banks in Kenya. The objective of the study was to establish the influence corporate governance practice on financial distress among Commercial Banks in Kenya. The study adopted a causal research designs to establish the variation between variables of the study. The study adopted a census approach where information was collected from all the 43 Commercial Banks operating in Kenya. The study used both primary and secondary data sources. The primary data was collected using a structured questionnaire consisting of close-ended and open-ended questions. Secondary data on indicators of financial distress was collected using Audited and Published Accounts. Quantitative data was collected from audited and published accounts to calculate Working Capital Ratio, Earnings before Interest Tax (EBIT), Prepaid Earnings, Market Value of Shares and Volume of Sales. A pilot test was conducted to determine the reliability and the validity of the data collection instrument. Data was analyzed using descriptive statistics and t-test was used in testing the significance of the effect between dependent variables and independent variables at 5% level of significance. In addition, Altman Z-score model was used to analyze information collected form the financial statements of commercial banks for the period between 2011-2015. The analysis was done using Statistical Packages for Social Sciences (SPSS Version21). The analyzed data was presented in tables. Multiple regression analysis was used to determine the cause effect relationship between variables. It was established that Commercial Banks experienced a drastic decline in profits generated for the period between 2011-2015 due to corporate governance issues. After conducting multiple regression, it was established that a unit increase in independent variables (Board Characteristics, Stakeholder Rights, Transparency and Disclosure and Internal Control Systems) resulted to a decrease in financial distress among commercial banks in Kenya. The study concluded that there was a statistical significance between the independent variables and dependent variable. The study recommended that commercial banks should be formed of boards that comprise members with relevant knowledge to develop policies that will address needs of various stakeholders, disclose their financial statement annually to enhance investor confidence and reflect the accurate financial state of the firm and should integrate modern technologies to minimize fraudulent financial cases through internal and external transaction.