Effects of Corporate Governance Practises on the Financial Performance of Commercial Banks in Kenya

Abstract

Of late Kenyan banks have encountered a number of corporate disasters which are associated to corporate governance. The fall of Imperial bank which is now under statutory management and the collapse of Chase bank in March 2016 is an indication that the industry is still facing issues of poor governance and management practices. Corporate failures are normally heralded by financial adversity and decreasing performance. Generally, positive improvements are unusual in Kenya,hence inquiry if timely and proper reaction is in use by the board when the initial signs of imminent distress is noticed. The study sought to determine the outcome of corporate governance practices on financial performance of the commercial banks in Kenya. The study’s population was entirely the 42 banks operating in Kenya. Data was obtained from 41 out of the 42 banks giving a response rate of 97.62%. The independent variables for the study were corporate governance practices as deliberated by, board size and independence, number of committees and number of meetings held annually. The control variable was bank size. Financial performance was the dependent variable which the study sought to make clear .It was measured by ROA. Secondary data was collected annually For 5 years. Multiple linear regression and descriptive cross-sectional research design was used to explore the association between the variables. Analysis of data was carried out by the SPSS version 22. The results of the study produced R-square value of 0.344 meaning that about 34.4 percent variation in the Kenyan commercial banks’ performance can be elaborated by the 5 selected independent variables while 65.6 percent in disparity of financial performance of commercial banks was associated with other factors not covered in this research. The study also found that the independent variables had a strong correlation with dividend payout ratio (R=0.587). ANOVA results showed the F statistic was significant at 5% level with a p=0.000. Therefore the model was fit to explain the connection between the selected variables. The results further revealed that board independence, number of committees and bank size produced positive and statistically significant values for this study. The study found that board size and board meetings are statistically immaterial factors of financial performance. This study commends that actions should be put in place to improve board independence, number of committees and bank size as this will advance financial performance of commercial banks in Kenya.