Effect of Corporate Governance on Credit Risk Management Among Commercial Banks in Kenya

Abstract

Numerous challenges involving corporate governance have been recognized in Kenya. The problems range from fraud to errors and mistakes. The issues are brought about by an array of variables relating to board size, board composition, corporate disclosures, and a lack of audit committees, which are essential in keeping company management in check. Kenyan banks like Chase Bank, Imperial Bank and Dubai Bank have gone under because of weak corporate governance mechanisms that have failed to keep credit risk in check. When an organization has effective corporate governance it is able to efficiently allocate its resources, have a sustainable management performance, report reliably and have proper investment strategy. These factors collectively lead to improvement in the financial position of the organization, its credit worthiness, decrease the information asymmetry existing amongst the organization and external investors, minimize the default risk, and eventually benefits debt holders. Therefore, the broad research objective was to determine the effect of corporate governance on credit risk management of commercial banks in Kenya. The main focus of the research was on board independence, audit and risk management committees and board size in relation to credit risk management of commercial banks in Kenya. The research utilized a descriptive research design targeting commercial banks, which are forty two in number. The research collected secondary data covering the period from 2016 to 2020. Panel data methodology was adopted and the analysis was done through SPSS. It was established that board independence and board size have significant impact on credit risk management. The research concludes that corporate governance significantly enhances credit risk management. The research thus proposes that shareholders of commercial banks in Kenya should increase the number of independent directors on the board while optimizing the board size so as to contribute towards credit risk management. The persona responsible for making policies at the central bank of Kenya should strengthen the corporate governance mechanisms of the respective banks so as to contribute towards credit risk management. The results of study will enable the government and the financial institutions regulatory agencies in coming up with policies that ensure proper composition of the boards of commercial banks, which may protect the public deposits and stakeholder’s welfare. Also, the study also assists the legislators in formulating better regulations to improve the operations of commercial banks and support contemporary practices to safeguard deposits made by the public and the resources of the investors. The “research will also be a significant addition to the management, consultants, shareholders of commercial banks as well as the public. This is because it may enable them to appreciate the significance of proper board composition on credit risk management that may empower them in making decision that are informed on the expertise, diversity and independence of board members.