The Effect of Corporate Governance on Enterprise Risk in Commercial Banks in Kenya

Abstract

Corporate governance is important in ensuring that companies are run in a transparent and professional manner. It is especially important in banks where the enterprise risk management has to be monitored to safeguard assets. Various facets of corporate governance help in management of enterprise risk and this study set out to evaluate their effect on enterprise risk in commercial banks in Kenya. Limited studies had been done on the effects of corporate governance on enterprise risk management in Kenyan banks. This is the research gap the study intended to fill. Research objectives were formulated from the research gap and research questions outlined in a bid to fill the research gap. Literature review was done, highlighting the important theories which were deemed important for the study and also important variables that were used in the study. Empirical literature review was also done by analyzing similar studies, their research design and outcomes which were used as a reference for the outcome. The study used cross-sectional study to fill the research gap and primary data was collected using questionnaire. Questionnaires were designed and sent to internal audit managers for their response in order to answer the research question. From the responses provided and the study research objective, descriptive statistics was provided and data analysis was done using the multiple regression analysis. The study findings indicated that CRO presence in executive board, board size, and board independence had a positive effect on the CAMEL rating, while board diversity had a negative effect on the CAMEL rating. The study had few limitations which included a low response rate from the banks but was sufficient for the study. This limitation was countered by providing questions that will provide accurate results and informing banks to cooperate in providing the information. The other limitation was accessibility to some information and the authentication of information provided by the respondents. This limitation was countered by informing respondents to answer all questions asked and corroborated information provided through annual reports. The study recommended a centralization of banks’ CAMEL rating by the Central Bank of Kenya for easier analysis and also other analytical techniques may be used in the analysis of the study. The study also recommended an increase in independent directors and expansion of the board size as these facets of corporate governance improved the banks’ enterprise risk management.