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

Abstract

Corporate governance attributes has been associated with numerous benefits including reducing the agency conflicts among stakeholders of a firm. A desirable structure of governance would assist in ensuring that resources of the firm would be utilized properly by management to benefit other stakeholders. Despite a tight regulatory framework, corporate governance issues are still experienced among commercial banks. This is evidenced by the recent collapse of Chase Bank and Imperial Bank and the struggles experienced by National Bank. This research sought to bring out the effect of corporate governance attributes on the financial performance among banks in Kenya. The research established the effect of gender diversity, ownership concentration and board independence on performance among banks. Credit risk, capital adequacy and bank size were used as the control variables in the model. Descriptive research design was used. The target population was the 38 banks in Kenya. Research variables data were derived from audited company's annual financial statements from 2016 to 2020 for all 38 banks making 190 observations. Regression and correlation analysis were used to test the study hypotheses by establishing the relationship between corporate governance attributes and ROA. The results indicated R2 of 0.234 which implied that the selected independent variables contributed 25.8% to variations in ROA. The study also found that ownership concentration (β=0.322, p=0.000), board independence (β=0.301, p=0.000) and bank size (β=0.207, p=0.001) had a positive and significant relationship with ROA among banks. Credit risk has a significant negative effect on ROA (β=-0.417, p=0.000) while gender diversity (β=0.002, p=0.649) and capital adequacy (β=0.003, p=0.834) were not statistically significant. The study recommends that policy makers should focus on ownership concentration as this contributes to ROA of the banks. The study also recommends that CBK which is the regulator should make it mandatory to all banks that they should have board independence.