Effect of Corporate Governance on Financial Performance of Commercial Banks in Kenya

Abstract

The basic role of corporate governance entails regulating the activities of the board. It also controls and oversights the actions of executives to enhance shareholder wealth. However, the weak corporate governance system has led to the collapse of the organizations that have survived to this day. Further, recently, there has been concerns on governance and firm’s performance interrelationship, largely because of increase in corporate scandals which results to a declining shareholder value, bank failures and dimmed investor confidence. In Kenya, the banking industry undertakes an important role in growth and the sector delivers higher savings levels with funding investment requirements. However, the performance of the sector has been dropping even since collapsed the collapse of three banks in less than 12 months in the 2015/2016 financial year. Regardless of the efforts put in place to streamline the financial sector, some banks are still under statutory management while others have been liquidated. This study sought to determine the effect of corporate governance on financial performance of commercial banks in Kenya. This research reviewed key theories to explain CG as, the agency theory, the stakeholder, stewardship and the shareholder theories. This study employed a descriptive research design and the population of the research consisted 39 commercial banks in Kenya as at 31st December 2021. This study used secondary data source and was sourced from the audited financials and yearly reports of the various Kenyan banking entities for five years from 2017 to 2021. Descriptive and inferential statistical tools were used for data analysis using the SPSS statistical software. Correlation and regression analysis were used to determine whether a relationship exists between independent and the dependent variable. The study finding revealed a positive and significant relationship between board size and financial performance. The findings indicated that board independence had a positive but insignificant relationship with financial performance while audit committee size had a negative and insignificant effect on financial performance. The study further established that bank size had a positive and significant effect on financial performance while liquidity had a positive but insignificant effect on bank performance. Finally, capital adequacy had a positive and significant effect on financial performance. The study concluded that board size, bank size and capital adequacy significantly affects Kenyan banking institutions financial performance. The study also concluded that board independence, audit committee size and bank liquidity had an insignificant effect on Kenyan banking institutions financial performance.