Effect of Corporate Social Responsibility on Financial Performance of Commercial Banks in Kenya

Abstract

Central in the field of finance is financial performance. “The need to explain how two firms operating within the same environment perform differently is a concern and several research works in finance have been devoted towards understanding this mystery. This led to studies which focus on various internal factors as well as external issues thought to be the cause of differing financial performance. Companies are continuously engaging in Corporate Social Responsibility activities, however, the society does not seem to be convinced that the organizations are doing it for the good of the society. The society almost always views an organization engaging in CSR as a public relations move rather than an activity carried out with the society’s best interests in mind. This study sought to determine how CSR influences financial performance of banks in Kenya. 42 commercial banks in operation in Kenya as at 31st December 2019 were the population of the study. Data from 37 banks was availed for the study which was 88.10% response rate. The predictor variables were CSR, capital adequacy, bank size and liquidity. Financial performance was given by ROA and it was the dependent variable. Secondary data was acquired for 5 years (January 2015 to December 2019) on an annual basis. Research design was descriptive cross-sectional design whereas association between variables was determined by multiple linear regression model. SPSS version 23 was used in data analysis. An R-square value of 0.293 was obtained and this can be translated to mean 29.3% of the variations in financial performance of banks in Kenya can be related to the four chosen predictor variables whereas 70.7% in the changes of financial performance of banks was linked to other variables that did not form part of this study. From the study it was further revealed that the predictor variables moderately correlated with financial performance (R=0.541). ANOVA results show that the F statistic was significant at 5% level with a p=0.000. Henceforth, the model was appropriate in providing an explanation of the relationship between the variables. Additionally, results demonstrated that capital adequacy, bank size and liquidity were positively and statistically substantial values in this study as the p values were less than 0.05 while CSR had a positive but not statistically significant influence on financial performance as shown by a p value greater than 0.05. The findings are consistent with previous studies which found that CSR contributes to other aspects of the firm and not necessarily financial performance. The recommendation is that measures should be set up to increase capital adequacy, bank size and liquidity as these three has a significant influence on financial performance. The study recommends the need for future studies to focus on the effect of CSR on other aspects such as firm value, sustainability and growth of firms or economy as a whole.