Board Characteristics and Financial Performance of Commercial Banks in Kenya

Abstract

Weaker legal systems and regulatory framework in developing countries like Kenya calls for stronger board govervance. Boards are charged with duties such as recruitment, controlling, supervising, oversight and directing top management with a view of instilling discipline, deterring malpractices, collapsing of banks and enhance the wealth of shareholders. Thus, forestalling sanity, stability and restore confidence to investors in the Kenyan banking sector. This informed this study to evaluate the influence of board characteristics on financial performance on commercial banks in Kenya. This study carried a census survey of 43 commercial banks in Kenya that were in operation in order to achieve the general objective of the study. Specifically, the study focused on how board size, board frequency of meetings, board gender diversity and board share ownership influenced the return on equity (ROE) of commercial banks in Kenya. The study also sought to establish the moderating effect of bank size on the influence of board characteristics on ROE of commercial banks. The study was informed by agency theory, resource dependence theory, stakeholder theory, transaction cost theory and stewardship theory. Descriptive research design was used to test the relationship of the independent variables on the dependent variable. Using data collection sheet, secondary data was obtained from audited annual reports and statements of commercial banks and Central Bank of Kenya websites for ten years 2009 to 2018 resulting to 340 observations. Applying both descriptive and inferential statistics, the study examined the relationship between board characteristics and the financial performance of all banks, large banks, medium banks and small banks. For descriptive statistics; mean, standard deviation, maximum, minimum and jarcque bera were used to indicate the nature of both independent and dependent variables. For inferential statistics, FEM was used to establish the coefficients of board characteristics which was then tested for their statistical significance using p-value at 95% confidence level. Using STATA Version 13 to analyse data, testing the five hypotheses adopting panel data and found board size, board frequency of meetings, board gender diversity and board share ownership had a positive and significant influence on return on equity (ROE) across the industry; board size, board frequency of meetings and board share ownership had a positive and significant influence on ROE of large and medium banks. Board gender diversity had a negative but significant influence on ROE. Additionally, board size, board frequency of meetings and board share ownership had a negative but significant influence on ROE across small banks. Bank size had a moderating effect on the influence of board characteristics on ROE of commercial banks, large banks, mediums banks and small banks. From these findings, some policy implications were suggested: an optimal board size of between 6-10 directors; further study on other variables since R2 was 63.45 percent explaining the variability of ROE of commercial banks in Kenya. The study concluded board characteristics plays a critical role in instituting stability and restores confidence in equity holders in commercial banks in Kenya that drives the economy.