Effect of Corporate Governance Attributes on Lending Ability of Commercial Banks in Kenya

Abstract

Kenyan commercial banks have increased their digitization efforts, putting financial innovations at the forefront, to strengthen their network base, decrease staff expenses, operate competitively with staff and enhance profitability. However, despite all this increased digitization, some banks have experienced a drop in profitability, others have been placed under statutory management, and still others have closed their doors. Apart from the competition for customers amongst Kenyan commercial banks, corporate governance has been hypothesized as an issue that would be influencing their lending ability. This research sought to bring out the effect of corporate governance attributes on the lending ability among banks in Kenya. The research established the effect of board size, gender diversity and board independence on lending ability 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 lending ability. The results indicated R2 of 0.958 which implied that the selected independent variables contributed 95.8% to variations in lending ability. The study also found that board size (β=0.141, p=0.002), gender diversity (β=0.310, p=0.000) and bank size (β=0.927, p=0.000) had a positive and significant relationship with lending ability among banks. Credit risk has a significant negative effect on lending (β=-0.287, p=0.000) while board independence (β=0.030, p=0.116) and capital adequacy (β=0.036, p=0.103) were not statistically significant. The study recommends that policy makers should focus on board size as this contributes to lending ability of the banks. The study also recommends that CBK which is the regulator should make it mandatory to all banks to have gender diversity in their boards as this will contribute significantly to banks’ lending ability.