The effect of corporate governance practices on the financial performance of commercial banks in Kenya
MetadataShow full item record
It is in a bank that savers deposit money and it's from a bank that an entrepreneur obtains funds to finance his projects that ultimately contributes towards a nation's development. Banks therefore provides the safe haven for depositors and are the source for investment in productive sectors of the economy. To keep this conveyor belt of development alive there must be a high level of trust that will make depositors keep their money in the bank. It is on the basis of high level of trust that depositor's keep their money in the bank hoping to collect it at their convenience whenever need arises. The mobilization of savings is crucial in national economic activities since it is these savings that are invested to spur economic growth. A high savings rate is therefore vital to the growth of any economy as it provides vital resources for investment. It is argued that, the major reasons for the collapse of most of the banking institutions in Kenya could be attributed to: Weak corporate governance practices, poor risk management strategies, lack of internal controls, weaknesses in regulatory and supervisory systems, insider lending and conflict of interest. An analysis of these factors shows that honest arms length dealing, measured and temperate risk taking or in other words good corporate governance practices in the banking industry are for critical for successful performance in the industry. In the financial system, corporate governance is one of the key factors that determine the health of the system and its ability to survive economic shocks. The health of the financial system much depends on the underlying soundness of its individual components and the connections between them - such as the banks, the non financial institutions and the payment systems. In tum, their soundness largely depends on their capacity to identify, measure, monitor and control their risks. Banks face a wide range of complex risks in their day-to-day business, including risks relating to credit, liquidity, exposure concentration, interest rates, exchange rates, settlement and internal operations. The nature of banks' business - particularly the maturity mismatch between their assets and liabilities, their relatively high gearing and their reliance on creditor confidence creates particular vulnerabilities. The consequences of mismanaging their risks can be severe indeed - not only for the individual bank, but also for the system as a whole. This reflects the fact that the failure of one bank can rapidly affect another through inter- institutional exposures and confidence effects. And any prolonged and significant disruption to the financial system can have potentially severe effects on the wider economy. The study used diagnostic research design and also used both the primary and secondary methods of collecting data. A census study was done and hence the sample size of the study included all the 48 commercial banks in Kenya. Only 25 banks responded to the questionnaire. Both quantitative and qualitative data were collected for this study. Descriptive data analysis techniques were used in form of frequency distribution tables and graphs. The conclusion obtained from the study was that corporate governance practices affects the financial performance of the banks. Commercial banks operating in Kenya, like any other form of business organization, in today's dynamic financial landscape should focus on proper governance practices and principles not only to boost and enhance their financial performances but as path to gaining a better public image, thus recognized by the society in which the bank operates as socially receptive commercial bank(s) which may augment the bank operations and survival.