The Impact of Agency Costs on Financial Peformance of Commercial Banks in Kenya

Abstract

Agency costs stem from conflicts of interests that exist in a principal-agent relationship. The relationship is usually created since the principal may not be in position to undertake the tasks, either due to lack in technical know-how, or any other factor that would make it essential for the principal to seek the services of an agent. There are various principalagent relationships in a commercial bank with the most common being shareholder versus management relationship. Agency costs are hereby incurred with the aim of aligning the goals of the agents to those of the principal and therefore lead to achievement of the principal’s overall goals. This study was therefore designed to examine the impact of agency costs and the consequences thereof, on financial performance. A research methodology that looks into relationships between variables is descriptive design of research. It was therefore employed in this study in obtaining both the general and the specific objectives of the study. The study did a census of the 42 licensed commercial banks in the country. However complete information for all the variables for the five years under study between 2013 and 2017 was obtained for 26 banks only which was a response rate of 61.9%. Data was analyzed by use of SPSS Version 20.0 and various tables, means, percentages, and variations were obtained as output. The output in summary, showed a positive significant relationship between agency costs and financial performance of commercial banks. The finding led to the conclusion that commercial banks in Kenya that make significant investment on issues of directors remuneration and auditors remuneration end up having better financial performance as the agents are motivated to achieve the desired goals by the principals as this would result to achieving their goals as well. Increasing remuneration of the auditor enhances the monitoring of financial issues that compels the management to comply with the needs of the shareholders.