Effect of Ownership Structure on Financial Performance of Commercial Banks in Kenya

Abstract

Ownership structure leads to agency problems since majority shareholders have incentives and thus monitor actions of the management and influence on decisions. There has been a growing debate on whether ownership structure impacts on management decisions. This study was set out to determine the effect of ownership structure on financial performance of commercial banks in Kenya. The study used correlation and regression analysis to establish existing relationship between ownership structures and ROA. The study was guided by descriptive research design. The study population involved 42 commercial banks that were operational in the study period. Secondary sources of data spanning for a period between 2014 and 2018 were used. Analysis of data was executed using descriptive and inferential statistics: correlation and regression analysis. It was revealed that a negative and statistically insignificant correlation was noted between institutional ownership, state ownership and financial performance. Positive and statistically significant correlation was noted between bank size (r = .251, p = .000) and financial performance. Results from regression analysis established that the coefficient of determination was 10.1%, implying that the regression model used was a poor predictor. However, analysis of variance was 0.003; implying that it was statistically significant. Foreign Ownership, Managerial Ownership, Bank Size and Capital Adequacy produced a positive effect on ROA while institutional and state ownership were negatively linked ROA. The study recommends that firms should maintain high levels of managerial ownership. These imply that when managers should have a share plan, the firm will pay huge dividends and minimize monitoring costs. Also, banks should consider increasing the size of their firms in terms of assets as this will help generate higher returns