The effect of corporate governance practices on the financial performance of commercial banks in Kenya

Abstract

The study examined the effect of corporate governance practices on the financial performance of commercial banks in Kenya. The corporate governance practices discussed include the number of non executive directors, board size and board diversity-gender. Control variables affecting financial performance were also assessed. These included asset quality and management efficiency. The study sought to draw a relationship between these variables and financial performance. The study was based on a quantitative and exploratory research design used to evaluate objective data consisting of numbers. The data gathered was from secondary sources. This was later tabulated, analyzed and presented in tables and graphs to draw meaningful findings. A multiple linear regression model was used to show the relationship between the independent and dependent variables. ANOVA analysis was also used to test the overall significance of the model. The study found that most the variable showed a positive relationship with financial performance. For instance, board size was seen to have medium negative correlation of -0.56 which implied that as board size increased, the financial performance of banks reduced. This was in line with literature review where various scholars advocated for a reasonable board size. An optimal board was considered most efficient and depicted better performance. The study also found that there was no significant relationship between the financial performance of commercial bank and gender diversity of the board. This was shown by the strong negative correlation of -0.90. This therefore implied that other factors had an effect on the financial performance while gender diversity of the board did not have. ANOVA indicated the significance of the model with a P value of 0.002 which was lower than the conventional 5% significance level. This analysis implied the variables in the model were good joint predictors of financial performance. The coefficient of determination (R square) was 70.8% and this showed a good regression on the variables. This analysis implied the variables in the model were good joint predictors of financial performance. Finally the conclusion drawn from the study indicates that indeed corporate governance practices affect the financial performance of commercial banks in Kenya specifically, board size and the number of non executive directors. The gender diversity of the board on the other hand may sound conventionally upright but does not depict a relationship with financial performance. It does not affect the performance of the firm. This could be because the banking industry is male dominated and the boards specifically comprise of men who are in the top management of the in the industry. From this, I would recommend that the CBK introduced a regulation to hold a certain percentage of board positions for women then further research to be conducted based on this recommendation to show whether the all inclusion of female directors on boards would therefore have an effect on the financial performance of the commercial banks in Kenya