The effect of corporate governance on financial innovation of Commercial Banks in Kenya

Abstract

A growing body of evidence shows that laws and institutions that influence corporate governance correlate with economic growth. Another strand of theory states that economic growth results from firm-level innovation. Innovation by firm managers is affected by the incentives provided by internal as well as external governance mechanisms such as the market for corporate control. Despite the undeniable importance of corporate governance in explaining financial innovation, the impact of corporate governance on innovation is still an area of study that has not been adequately researched on in Kenya. Focus on corporate governance in the financial sector is crucial mostly because the banking industry became highly exposed to scrutiny by the public and many lessons were learnt because of the risks involved including the adverse publicity brought about by failings in governance and stakeholder relations for instance. This study sought to establish the effect of corporate governance on financial innovation of commercial banks in Kenya. The objective was accomplished by assessing the effect of size of the board, independence of the board, board diversity, size of the bank and the number of committees’. The study had target population of all 43 commercial banks. The study used entirely secondary data obtained from the CBK and publicized annual reports of the individual banks. The researcher employed descriptive research design to explain the situation. SPSS software was used to present the data in tables as percentages and mean. The data for the five year study was analysed to generate multiple regression between dependent variable (financial innovation) and independent variables. The study found out that corporate governance existed in all the banks but the board structures varied with the bank. The findings also show board size, board independence and board diversity to have a significant effect on the financial innovation whereas the size of the bank and number of committees has an insignificant effect. Additionally, the study found out that corporate governance has a significant positive effect on financial innovation with a coefficient correlation of 0.6516. Further the study established that board size, board diversity, size of the bank had positive relationship with financial innovation whereas board independence and number of committees had a negative relationship. The study thus concludes that the effect of the corporate governance on financial innovation depends on the variable. The study thus recommends an evaluation of the board composition in the commercial bank as it influences financial innovation.