Effects of Institutional Governance on Financial Performance of Commercial Banks in Kenya

Abstract

Although the banking industry is a very important vehicle for spurring economic development and especially in least developed economies, the Kenyan commercial banks are facing financial performance constraints, leading to collapse and liquidation of numerous commercial banks. Accordingly, borrowers, depositors and shareholders are suffering enormous financial losses; which have dramatic implications for the economy of the country. The crisis in this very crucial industry has associated with poor institutional governance. Although various studies have been undertaken on institutional governance and financial performance, majority of the studies have yielded inconsistent result while others have contextual, conceptual and methodological gaps. So, this study analysed the effect of institutional governance on financial performance of Kenyan commercial banks. It adopted descriptive and diagnostic research designs to outline the characteristics of existing phenomenon. The target population was the 43 commercial banks licensed and operating in Kenya. Since the sample size was easily accessible and manageable the study used census. Data was collected using primary sources using a questionnaire, Data was analysed using quantitative analysis approach to produce descriptive statistics and thereafter multiple regressions to estimate a model. The study found that at 5% significance, level board size, ownership concentration, audit structure and, board composition, positively and significantly affects financial performance of licensed Kenyan Commercial Banks. The study recommends that Kenyan Commercial Banks should review their board size policies, largely focus on having audit committee, and strengthen their board composition guidelines to ensure board diversity comprises.