The Relationship Between Ownership Structure and Financial Performance of Commercial Banks in Kenya

Abstract

The ownership structure of Commercial Banks is of much importance owing to it as an internal mechanism of Corporate Governance. The different ownership identities over the past findings have shown difference in the monitoring capability and practices of the banks they own eventually showing disparities in their financial performance. Therefore, this study addressed this with an objective of finding the relationship between the different ownership identity structures and financial performance of commercial banks licensed by the Central Bank of Kenya. The study used descriptive research design. It sampled 20 commercial banks drawn from the different ownership identities. Data was collected from secondary sources such as the annual reports of the Central Bank of Kenya, the Kenya Banking Survey 2013 and annual reports of the individual commercial banks. The data was then analyzed using the SPSS and the correlation regression and multicollinearity of the data together with their tests of significance presented. Findings of the study showed a positive relationship between foreign ownership and the different parameters of financial performance. This finding, consistent with earlier findings showed the high monitoring capabilities of foreign owners and efficiency. Government ownership had a negative relationship with asset quality, earnings quality and management efficiency indicating laxity in prudent credit management practices and also inefficiency of operations and poor returns. Institutional ownership on the other hand showed a positive relationship with most of the parameters with an exception of some commercial banks. This brought out the negative relationship of block holders with very high shareholding to financial performance. Such blockholders were characterized by unopposed unfavourable decisions by management. Individual Ownership on the other hand showed a negative relationship with earnings quality indicating the laxity among individual owners to monitor since their interest is mainly on diversification of risk. The study clearly brought out the importance of monitoring capabilities of ownership structures of commercial banks to their performance. The importance placed to monitoring translated to better credit management policies, efficiency and quality in earnings. Based on the findings of the study, it is recommended that government and individual owners need to increase their monitoring capability. Individual owners need to make qualified decisions in their investments and government should step up to improve their credit management and ensure higher returns in their investments by working on the quality of their earnings and efficiency.