Corporate Governance and Financial Performance of Commercial Banks in Kenya
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Date
2025-10
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Kenyatta University
Abstract
Commercial banks are key financial intermediaries and major drivers of economic development worldwide. The sustainability of these banks, like any organization, depends on their financial performance. In Kenya, the financial performance of commercial banks has shown variability, prompting consolidations and takeovers in some institutions and the failure of others due to poor management, weak internal controls, and inadequate corporate governance. This study examined the relationship between corporate governance and the financial performance of commercial banks in Kenya. Specifically, it evaluated the effects of ownership structure, board diversity, audit quality, and board transparency on financial performance, while also assessing the moderating role of bank size. The study was anchored in Agency Theory, Lending Credibility Theory, Stakeholder Theory, and Resource Dependency Theory. A correlational research design was employed, focusing on thirty-eight officially listed commercial banks in Kenya. Secondary data were collected from published financial statements and analyzed using descriptive statistics, correlation analysis, and multivariate regression techniques. Validation tests, including assessments for normality, autocorrelation, multicollinearity, and heteroscedasticity, were conducted to ensure the reliability of the regression models. The results revealed that ownership structure had a negative impact on financial performance, while board diversity, audit quality, and bank size positively and significantly influenced financial outcomes. Board transparency exhibited a minor negative effect on performance. Bank size significantly moderated the relationship between corporate governance and financial performance. The findings underscore the critical role of corporate governance in enhancing the financial performance of commercial banks and recommend strengthening board diversity, improving audit processes, and strategically managing ownership and transparency practices. The study provides valuable insights for bank managers, policymakers, regulators, and scholars seeking to optimize financial performance in the banking sector. Additionally, validation checks such as the normalcy assessment, autocorrelation examination, collinearity test, and heteroscedasticity evaluation were conducted to confirm the foundational premises of the regression model were satisfied. The study revealed that proprietorship arrangement adversely impacts financial performance, while directorial variety, scrutiny excellence, and institution scale have beneficial and notable impacts. Council openness exhibited a minor yet adverse impact on the fiscal efficacy of Kenyan commercial banks. Moreover, institution scale notably influenced the relationships between organizational oversight frameworks and performance. The study infers that corporate governance serves a vital function in boosting monetary outcomes in commercial banks, particularly when institution scale is factored in. It advises bolstering directorial variety, refining examination procedures, and tactically overseeing proprietorship and transparency policies to optimize financial performance. The study's findings will be valuable to administering commercial banks, strategists, overseers, academics, and progressing finance theories.
Description
A Project Submitted to the School of Business, Economics and Tourism for the Award of the Degree of Master of Business Administration (Finance) of Kenyatta
University. October, 2025
Supervisor
Gerald Atheru