Effect of Corporate Governance Practices on Financial Performance of Tier Two Commercial Banks in Kenya

Abstract

The objective of the research was to determine the effect of corporate governance on financial performance of tier two banks in Kenya. The secondary data used was extracted from the audited financial statements of tier two commercial banks in Kenya. The study period was six years (2012-2017). Out of the fourteen tier two commercial banks, the research managed to get data for twelve banks amounting to 85.71% response rate. The data was analyzed with the use of SPSS. Descriptive statistics such as means and standard deviations were used to analyze the data while inferential statistics such as correlation and regression analysis were used to test the causal relationship between the dependent and in dependent variables. Financial performance was measured using return on assets while corporate governance was measured using board size, board diversity, and board structure and board committees. Bank Size and Bank liquidity were used as control variables. The study concludes that there is a strong relationship (R= 0.513) between corporate governance and financial performance of tier two commercial banks in Kenya. Corporate governance accounts for 26.3% of the total variance in the financial performance of tier two commercial banks. The study also concludes that different practices of corporate governance and the control variables used affect financial performance of tier two commercial banks differently. Board Size and Bank Size influences financial performance positively but only the effect of bank size is statistically significant. Board diversity, board structure, bank liquidity and board committees influence financial performance negatively. The shareholders of tier two commercial banks in Kenya should therefore consider increasing the size of their banks in terms of assets as this will help the banks to generate higher returns. The shareholders of tier two commercial banks in Kenya should consider reducing the number of committees as this will results to improved financial performance. It was difficult to obtain the data because some of the data sought was not readily available in the financial statements. This explains why the researcher was only able to get data from twelve banks out of the possible fourteen. In future, a study aimed at evaluating how the quality of corporate governance affects the satisfaction of the key stakeholders of tier two commercial banks in Kenya would be beneficial to the management of the said banks and the scholars in general.