Effects of Corporate Governance on the Financial Performance of Commercial Banks in Kenya

Abstract

Corporate governance theories suggest a positive relationship between corporate governance and financial performance. Financial performance is an outcome of good corporate governance practices adopted by firms. The study sought to establish the impact of corporate governance on the financial performance of commercial banks in Kenya. The researcher adopted a correlational research design, generally used to measure relationship between variables. Secondary data was obtained from annual reports downloaded from central Bank of Kenya. The data was analyzed using descriptive statistics as well as inferential statistical analytics. Results showed that ownership structure, board independence, board composition and bank size as predictors had a strong collective relationship with financial performance (r=0.560) and contribute 31.4% to the change in financial performance (r2= 0.314). From the regression, ownership structures, board independence and bank size had a positive effect on financial performance. On the other hand, board composition showed a negative effect on financial performance. The study concludes that ownership structures, board independence and bank size have a positive effect on financial performance of commercial banks in Kenya. On the other hand, board composition has a negative effect on financial performance of commercial banks in Kenya. The study recommends reduced number of executive directors within the commercial banks. The study also recommends increased local ownership with an increase in number of independent directors. There is also the need for increased value of assets for increased financial performance. Further research is recommended based on other factors of financial performance, different variable measures, different firms and based on primary data.