Financial Ethics and Performance of Kenyan Small and Medium Commercial Banks

Abstract

Purpose: Past empirical investigations on financial ethics have failed to provide an empirical analysis of the primary unethical banking practices prevalent in Kenya’s banking industry, or the perceptions of banking professionals on the type of concerns they believe might be influencing their resolution making. This study aimed at investigating the impact of ethical financial practices on the financial performance of small and medium banks in Kenya. The specific objectives of this research were to; analyse the effect of insider abuse and to investigate the effect of predatory lending on financial performance of small and medium sized commercial banks in Kenya.
 Methodology: The research was informed by the Ethical Egoism Theory which predisposes that people should entirely act in their self- interest. The study involved 124 heads of key functional units of the 33 small and medium banks in Kenya that were operational at the time of the study. From the target population of 124 bank managers, a proportionate stratified sample of 94 bank managers was selected for the study using Cochran and Snedecor (1989). Utilizing both primary data, the study applied a semi-structured questionnaire as the main research instrument. Both descriptive and inferential statistics were used for data analysis using the 23rd version of SPSS. From the analyses, the independent variables (predatory lending and insider dealings) moderately influenced the dependent variable (ROA and ROE) with an adjusted R2 = 0.025.
 Findings: From the findings, the Multiple Determination Coefficient (R2) was 0.056 meaning that linear regression of “Low fit goodness” explains only 5.6% of the variation in the economic performance of the small and medium banks in Kenya. To establish the cumulative effect of the variables of prediction on the dependent variable, the Analysis of Variance (ANOVA) was applied to determine and analyse the effects of interaction. The study concluded that, a number of insider dealings and predatory banking practices still prevail among the small and medium Kenyan banks despite the ongoing reforms in the banking sector.
 Recommendations: The study recommends that commercial banks and other financial institutions in Kenya invest more in establishing systems that promote financial ethics in their service delivery to build their core competency in the dynamic market. At policy level, this study proposes that the Central Bank of Kenya, the Treasury and, other line agencies fast-track the fiscal reform agenda with regards to prudential banking and financial service delivery to mitigate the influence of systemic supervisory weaknesses.