Corporate governance and financial distress in commercial banks in Kenya

Abstract

Kenya is among countries in Africa where the financial system by regional standard is relatively well developed, although there are fundamental impediments that hinder full exploitation of its potential. Financial distress is considered as one of the most significant threats for commercial banks in both developed and emerging economies despite their size and nature. The study sought to establish the relationship between corporate governance and financial distress in commercial banks in Kenya. The study’s specific objectives were to establish the relationship between government ownership, board size, independence of the board and auditing by the big four auditing firms and financial distress in commercial banks in Kenya. The study was based on the agency theory and the theory of inspired confidence. The study applied the descriptive research design. The study population was the commercial banks in Kenya that were operational and duly registered as at 31st December 2015. The study was a census of the commercial banks. The study utilized secondary data. The data was collected for five years. The data was collected from the published financial statements of the banks, the websites of the banks, CBK bank supervision reports, CMA and the NSE. The panel data collected was analyzed using the panel data model. After the analysis, the results were presented in tables and figures.The results indicated that board size, government ownership and auditing by the big 4 did not have any effect on the financial distress of commercial banks in Kenya. The results also indicated that independence of the boardwas a significant positive influence of the Z score. This indicates that having a high proportion of independent directors was expected to strengthen the banks’ Altman Z score this reducing its chances of distress. Following the findings from the study, the following recommendations are made. Commercial banks should be very observant of the composition of the board to ensure that the proportion of independent directors in the board is high so that the board can be more independent and able to monitor the bank. Secondly, corporate governance is a key factor in stewardship of the banks. Even though the board size and auditing by the big four indicated to have no effect on financial distress, there are other indirect advantages that can emanate from having a board of optimal size and being audited by a top firm. These include efficiency, provision of other support services and credibility.