Effect of Board Characteristics on Risk Taking Behaviour of Commercial Banks in Kenya

Abstract

The primary goal of the research was to ascertain how board characteristics affected Kenyan commercial banks' risk-taking behaviour. Three theories—agency theory, stewardship theory, and resource dependency theory—served as the foundation for the study. The study also used a cross-sectional survey design and a correlation descriptive research approach. As of June 30, 2022, the study's sample included 41 commercial banks that were active in Kenya. The research used secondary data gathered from a range of sources, including reports submitted to the Central Bank of Kenya and audited financial statements of the relevant enterprises. Both descriptive and panel regression was used as the analyses' foundation. Based on the descriptive statistics, the study found that credit risk varied from 0.00 to 0.76 while size of the board of directors varied from 0.6 to 1.15 with an average score of 0.9307. Concerning gender diversity, the study found that in some commercial banks, female directors were not included in the board of directors although in other commercial banks, six in every ten directors are female. On average, the board of directors in commercial banks comprises of three female directors. The study also found that, in terms of total assets, commercial banks in Kenya have been growing steadily between 2017 and 2021. Regarding inferential statistics, the research found a link between board size (B=-0.341, a=0.007) and risk-taking conduct in Kenyan commercial banks. The research also found a negative (-0.013, -0.548) link between CEO ownership and organizational risk-taking behavior. The research determined that having directors who are more independent boosts the ability of the bank to engage in hazardous investments based on directors' independence as a feature of the board of directors. The research revealed a substantial (p=0.008) positive association between board independence and commercial banks' capacity for risk-taking. A positive and significant association between foreign ownership and the risk-taking behavior of commercial banks was also found by the study's results (B=0.197, a=0.007). Based on the study's analysis of the total impact of board characteristics on commercial banks' willingness to take financial risks, it was determined that board size, CEO ownership, independent directors, foreign shareholding, and gender diversity together account for 8.8% of this willingness. However, when financial leverage and business size are taken into account as control factors, the total impact of board features on risk-taking behavior rises to 18.7%. The study recommends that commercial banks should consider having an average number of independent directors in order to have appropriate risky investment that may jeopardize the financial performance of the bank. Similarly, the study recommends that commercial banks that the composition of the board concerning gender diversity. With the positivity in relation to risk taking behavior of commercial banks, there should be appropriate mix in gender to avoid venturing into more risky behavior that may jeopardize the operation of the bank in case of failure in the investment results.