Corporate governance, risk management, firm characteristics and financial performance of commercial banks in kenya

Abstract

Sound Corporate Governance and effective Risk Management are accepted as a major cornerstone of bank management by academicians, practitioners as well as by regulators. The Basel core principles for effective banking supervision, the Central Banks and Capital Market Authorities of different jurisdictions have, from time to time, issued guidelines on both Corporate Governance and Risk Management to ensure comprehensive and proper functioning of the financial system that align the interest of all the stakeholders .In spite of these interventions a number of banks have failed to operate above board forcing the regulators to intervene to ensure sanity in the financial system. The main objective of the study was to establish the relationships among Corporate Governance, Risk Management, Firm Characteristics and Financial Performance of commercial banks in Kenya. The specific objectives were: To determine the effect of Corporate Governance on Financial Performance of commercial banks in Kenya, to assess the effect of Risk Management on the relationship between Corporate Governance and Financial Performance of commercial banks in Kenya, to investigate the effect of Firm Characteristics on the relationship between Corporate Governance and Financial Performance of commercial bank in Kenya and to evaluate the joint effect of Corporate Governance, Risk Management and Firm Characteristics on Financial Performances of commercial bank in Kenya. Different performance metrics have been used to evaluation of Banks performance in worldwide by regulators and scholars. This study used the CAMEL rating system that analyses capital adequacy, asset quality, management quality, earnings, and liquidity of Banks incorporating relevant financial ratios. The CAMEL system has become important tool of measuring the overall soundness and safety of banks in the light of global financial crisis and bank failures. The study used correlation and multiple regression analysis to establish the relationship between Corporate Governance and bank financial performance. The Baron and Kenny (1986) approach was used to test the intervening and moderating effect of Risk Management and Firm Characteristics respectively on the relationship between Corporate Governance and bank Financial Performance. Finally the multiple regression analysis was used to test the joint effect of Corporate Governance, Risk Management, and Firm Characteristics on bank Financial Performance. The study was guided mainly by the Agency theory, adopted a positivism research philosophy and used a cross sectional descriptive research design. The population consisted of 43 commercial banks registered in Kenya as at 31st December 2014. Descriptive statistics and diagnostic tests were conducted on the data thereafter inferential statistics namely correlation analysis and regression analysis were used to test the hypotheses. The findings of the study were that a statistically significant relationship exit between Corporate Governance bank Financial Performance, the intervening effect of Risk Management on relationship between Corporate Governance and attributes of Bank Financial Performance was inconclusive, Firm Characteristics generally moderated the relationship between Corporate Governance and bank Financial Performance and Corporate Governance, Risk Management and Firm Characteristics jointly significantly predicted all bank Financial Performance attributes except for Liquidity. The study recommends that regulators, boards and management of commercial banks to ensure congruence in their activities (oversight, implementation and monitoring) with corporate objectives to enhance improved bank Financial Performance and value maximization.