Impact of Internal Controls on the Financial Performance of Commercial Banks in Kenya

Abstract

The transformation within the business landscape results from the convergence of multiple complex factors. Market conditions, competitive dynamics, strategic choices, and external economic forces intricately intertwine, shaping the environment in which organizations operate. Thus, the primary aim of this inquiry was to discern how internal controls impact the performance of commercial banks in Kenya. To undertake this examination, a meticulously crafted descriptive cross-sectional census survey design was employed to gather comprehensive insights. A single questionnaire was thoughtfully administered to high-level management members, encompassing both male and female leaders, resulting in a total of 82 enlightening respondents. This assessment relied on an intensive descriptive cross-sectional census survey approach, involving all 41 commercial banks operating within the vibrant economic hub of Nairobi, Kenya. The data collection process revolved around the use of a meticulously structured questionnaire, which included a thoughtful blend of closed-ended and open-ended inquiries. These questionnaires were distributed to high-ranking Senior Management Officers, individuals vested with the authority to oversee internal controls, financial reporting, and overall performance within their respective banks. The results unveiled by the model summary reveal that the estimated model effectively explains up to 60.5% of the total variations in bank performance, substantiated by the R Square value of 0.605. The determinants of bank performance identified in this examination encompass risk assessment, monitoring, assurance, information communication technology, and financial reporting. It's crucial to note that the unexplained 39.5% of fluctuations in bank performance may be attributed to variables lying outside the scope of this comprehensive investigation. Importantly, the regression coefficient for risk assessment was both positive and statistically significant (r = 0.236, p = 0.003<0.05), indicating that risk assessment plays a vital role in influencing commercial bank performance. Additionally, the regression coefficient for monitoring was both positive and statistically significant (r = 0.121, p = 0.001<0.05), highlighting the significance of monitoring in determining the performance of commercial banks. Moreover, the regression coefficient for assurance was both positive and statistically significant (r = 0.223, p = 0.015<0.05), underscoring the importance of assurance in driving commercial bank performance as it contributes to long-term profitability by consistently delivering quality goods and services. As a consequence, the regression coefficient for information communication technology (ICT) was both positive and statistically significant (r = 0.279, p = 0.000<0.05), emphasizing the pivotal role of ICT in influencing commercial bank performance. ICT solutions have been instrumental in addressing various challenges faced by banks. In a nutshell, the regression coefficient for financial reporting was both positive and statistically significant (r = 0.154, p = 0.015<0.05), indicating that financial reporting significantly impacts the performance of commercial banks. In light of these compelling findings, it is proposed that commercial banks in Kenya should wholeheartedly adopt the practice of routine risk assessment as an established operational standard. This proactive approach can serve as a cornerstone for fortifying performance and resilience in the face of ever-evolving challenges. Furthermore, it is suggested that additional research endeavors be undertaken to delve into the intricate nexus between management capabilities and the financial performance of commercial banks in Kenya. This uncharted territory represents a fertile landscape for exploration and scholarly investigation