Assessment of corporate governance and return on assets of commercial banks in Kenya.

Abstract

The study as emphasized in the problem statement was to assess the implementation of the corporate governance mechanisms as per the requirements of the prudential guidelines issued by the Central Bank of Kenya in 2006. Following the financial crisis witnessed in the 1990’s that witnessed the collapse of various banks in Kenya, as well as privatization of banks and reduction of government control of banks calling for amendments in the banking supervision regulations. The study relied on the provisions of the prudential guidelines on corporate governance as well as the requirements of the CMA for the listed banks and the Sharia banking requirements for the Islamic banks. The data collection was done on the basis of five mechanisms of governance being shareholder’s rights, management and supervisory board, commitment to corporate governance, transparency and auditing for the independent variables, and return on assets for the dependent variable and was done from the annual reports and the websites of the various banks as well as data as provided by the various banks on request. The outcome of the study as concluded in the findings reveals that banks have greatly improved on the implementation as majority have almost fully complied with a few areas still lacking like the shareholding disclosure of the privately owned banks and board of director’s composition on the local committees which in some do not meet the 3/5th required. Significant areas as per the analysis were the bank ownership whether foreign owned or local, the financial analysis capability of the board and the commitment in terms of ethics. In majority of the banks, the return on assets time series analysis indicated an increase over the five year period reviewed compared to before 2006 when there were no corporate governance guidelines. In conclusion, it is not conclusive to say that governance mechanisms are directly related to the improvement in the performance of banks as some have declining ROA over the period despite compliance to the requirements.