Effect of Corporate Governance Practices on Asset Quality Among Commercial Banks in Kenya

Abstract

Banks in Kenya have made significant investments in corporate governance to tackle issues about competition, income and cost. At the same time, the number of nonperforming loans held by commercial banks has increased. The critical question is whether corporate governance practices have been effective in enhancing the asset quality of banks. Given that corporate governance structures costs money, it is critical to investigate the link between growing NPLs and corporate governance. This study sought to investigate how corporate governance affects asset quality among commercial banks in Kenya. The Corporate governance indicators were board size, gender diversity and board independence. Bank liquidity, capital adequacy and bank size were the control variables while the dependent variable was asset quality, measured as the ratio of NPLs to total loans. The study was guided by agency theory, stakeholder theory and stewardship theory. Descriptive research design was utilized in this research. The 40 commercial banks in Kenya as at December 2021 served as target population. The study collected secondary data for five years (2017-2021) on an annual basis from CBK and individual banks annual reports. Descriptive, correlation as well as regression analysis were undertaken and outcomes offered in tables followed by pertinent interpretation and discussion. The research findings yielded a 0.530 R square (R2) value implying that 53% of changes in banks’ asset quality can be described by the six variables chosen for this research. The multivariate regression analysis further revealed that individually, board size has a negative and significant effect on asset quality of banks (β= -0.141, p=0.001). Board independence also has a negative and significant effect on asset quality (β= -0.310, p=0.000) while gender diversity exhibited negative but not statistically significant influence on asset quality (β= -0.030, p=0.116). Both bank size and bank liquidity have a negative effect on asset quality of banks as shown by (β= -0.927, p=0.000) and (β= -0.287, p=0.000) respectively. Capital adequacy exhibited a negative but not significant influence on asset quality as shown by (β= -0.036, p=0.103). The study recommends the need for banks to have adequate board members as this reduces the level of NPLs in a bank. The study further recommends the need to have an independent board as this also enhances asset quality by providing a better monitoring mechanism. Future research ought to focus on other financial institutions in Kenya to corroborate or refute the conclusions of this research.