Inter-Relationship between Corporate Governance and the Financial Performance of Commercial Banks in Kenya

Muhindi Alfred Okello and Gerald Atheru
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Muhindi Alfred Okello: Department of Accounting and Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya.
Gerald Atheru: Department of Accounting and Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya.

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Abstract: The objective of this study was to examine the relationship between corporate governance and the financial performance of commercial banks in Kenya. Specifically, it explored how ownership structure, board diversity, audit quality, board transparency, and institutional size influence financial performance. The research was anchored on Agency Theory, Lending Credibility Theory, Stakeholder Theory, and Resource Dependency Theory. A correlational research design was adopted, targeting 38 registered commercial banks in Kenya. Secondary data covering governance variables and financial performance indicators were collected and analyzed using descriptive statistics and regression analysis in STATA version 14. Diagnostic tests were conducted to ensure model reliability and validity. The findings revealed that ownership structure had a significant negative effect on financial performance, suggesting that concentrated ownership may reduce operational efficiency. Board diversity, audit quality, and institutional size exhibited significant positive effects, highlighting their importance in improving bank outcomes. Board transparency, however, had a small negative effect on performance. Additionally, institutional size significantly moderated the relationship between governance structures and financial results, indicating that the effectiveness of governance practices is influenced by the scale of the bank. The study concludes that robust corporate governance, aligned with institutional size, is essential for enhancing the financial performance of commercial banks. It recommends that banks improve board diversity to leverage diverse perspectives, strengthen audit functions to ensure accountability, and strategically manage ownership and transparency structures. These measures are crucial for promoting resilience, competitiveness, and long-term sustainability in Kenya's banking sector.

Date: 2025-08-22
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Published in Asian Journal of Economics, Finance and Management , 2025, 7 (1), pp.772-790

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05220118

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