Impact of Corporate Governance Practice on Financial Performance of the Banking Industry in Kenya

Abstract

Due to the increased interest in corporate governance adherence by stakeholders and regulatory bodies of corporations in Kenya, the area has been of keen interest to scholars also. This study aimed at establishing the influence of various corporate governance aspects especially the role of the board on the financial performance of the banking industry in Kenya. The objectives of this study were to determine whether corporate governance practice had any effect on the financial performance of Kenyan commercial banks. The study focused on the role and attributes of the board of directors. The study was based on a five year period between the years 2006 to 2010 and was a census of all the banks in Kenya. Secondary data was collected from the Central Bank of Kenya and annual reports of the banks. Descriptive statistics, Pearson correlation and linear multiple regression were used as the underlying tests for empirical analysis, and to test existing relationships between independent and dependent variables. The findings from the data analysis show that there is a positive relationship between corporate governance and financial performance in the banking industry in Kenya. Based on the findings, it is concluded that the composition of the board of directors is positively correlated to the financial performance of the Kenyan commercial banks. It is also concluded that board size is correlated to the financial performance of the banks. The results from the regression analysis show that both board size and board composition are predictors of financial performance. Correlation between ROA and board composition is positive while board size and ROA also has a positive relationship showing that they are predictors of financial performance. There was separation of the role of CEO and chairman of the board in all the banks except one thus CEO duality and board monitoring are constant in the entire study period and thus have no influence on the financial performance of the banking industry