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

Abstract

The central aim of the management of a bank is to ensure that there is a maximization of shareholders wealth in the long run. The interpretation is that bank management aims at capitalizing on the company’s ordinary share market value. Corporate governance and risk management in any firm are closely related to each other. The firm’s performance sustainability is, moreover greatly dependent on the conclusive role played by both concepts. The present study’s drive was to examine how credit risk management in commercial banks in Kenya is impacted by corporate governance. This study made use of cross sectional survey design as it takes place at one point in time. The study relied on a census survey by looking at the entire 42 commercial banks in Kenya. The study obtained secondary data through abstraction from financial statements as well as corporate governance related statements for the commercial banks covered as they had been published in their annual reports. Descriptive analyses were used (means scores and percentages) to analyze the extent of corporate governance practices. Both multiple regression and correlation analyses were utilized to assess the association between discretionary Non Performing Loans / Total Loans as a credit risk management apparatus and corporate governance variables deemed significant for commercial banks. The significance was measured by the t-value, which denoted the number of standard error means diverged by the sample from the value tested. The inferential findings reveal further that the extent and direction of a company’s credit risk management is subject to the predictors in question. Findings indicate that large corporate practices, policies and rights of shareholders enhance credit risk management and such factors, when exploited, firm value is enhanced. Study findings may be regarded as an indicator that an appropriate structure of governance is significant among financial institutions as the same affects the management of credit risk by the institution. The study findings are not only geared towards fine- tuning Commercial banks’ governance with respect to policy direction, but also to ensure Commercial bank collapse related to governance is anticipated with a view not to damage the critical risk management process. The results furnish shareholders with pertinent knowledge that they have a crucial role to push banks’ management to enforcing and implementing good corporate governance. So as to control implementation of good corporate governance by the management, particular control mechanisms ought to be established.