Effects of Corporate Governance on the Performance of Commercial Banks, Kenya

Abstract

The aim of the study was to determine the effect of corporate governance on performance of Kenya commercial banks. Descriptive research design was used. A census targeting Kenyan commercial bank for the year 2017 was conducted. The study used primary and secondary data acquired from questionnaire and Central bank of Kenya annual bank supervision report and respective commercial banks’ websites. Questionnaires were used to measure three balanced scorecard perspectives; internal and customer business perspective & innovation and learning. Also, corporate governance measures used in the questionnaire include size of the board, board meetings frequency & board independence. Bank size was used as the control variable. Statistical Package for Social Sciences (SPSS) version 20 was used to analyze the collected data. Descriptive statistics was used to describe the variables using mean and standard deviation. Regression analysis was used to establish the effect of corporate governance on performance on Kenyan commercial banks. Regression model showed that size of the board and board’s independence had positive effect on performance and not statistically significant (β= 0.337 and 0.010 respectively, p-value ˃ 0.05). Board meetings frequency had a negative impact on performance and not statistically significant (β= -0.301, p-value ˃ 0.05). The bank size had a positive impact on performance and statistically significant (β= 0.134, p-value˂ 0.05). Correlation analysis showed that size of the board and bank size had a positive correlation and was statistically significant (β= 0.436, 0.46 respectively, p-value ˂ 0.05). Independence of board had a positive correlation coefficient and not statistically significant (β= 0.051 and p-value ˃ 0.05). Board meetings frequency had a negative correlation coefficient and was not statistically significant (β= -0.094, p-value˃ 0.05). The results of the analysis of variance (ANOVA) had F ratio of 3.481 with a level of significance of 0.022, this shows that the effect of size of the board, board meetings frequency, board independence and bank size was statistically significant. The adjusted coefficient of determination R2 was used to evaluate the explanatory power of the independent variables. Adjusted coefficient of determination for the regression was 25.5% indicating that the independent variable explained only 25.5% of the variation in the dependent variable. The study concluded that the effect between corporate governance and performance was positive. The limitation of this study was that it was carried on only commercial banks in Kenya neglecting other financial institutions. This study recommends that banks should monitor frequency of board meetings because it appears to affect the performance of the banks negatively. Also, to broaden the board size, promote bank size and increase number of outside directors.