The effect of governance on performance of commercial banks in Kenya: a panel study

Abstract

Purpose

The purpose of this paper is to investigate the effect of corporate governance on the performance of 37 commercial banks in Kenya over the period 2005‐2009.

Design/methodology/approach

The paper uses two measures of performance, i.e. return on assets (ROA) and return on equity (ROE), and the dependent variables and three measures of governance – namely the board size, independent directors, and CEO duality – as the key independent variables. The study follows a panel econometrics technique to investigate the relationship between governance variables and bank performance.

Findings

The main findings are as follows: a large board size tends to impact performance negatively; the existence of independent board directors tends to enhance the performance of the banks; and there is no evidence that CEO duality or otherwise has impact on the performance of commercial banks in Kenya.

Practical implications

The study therefore recommends that for commercial banks in Kenya to register high performance they need to check the size of their board of directors and also increase the number of independent directors.

Originality/value

To the authors' best knowledge, this is the first study on Kenya that has used advanced panel data techniques.

Citation

Morekwa Nyamongo, E. and Temesgen, K. (2013), "The effect of governance on performance of commercial banks in Kenya: a panel study", Corporate Governance, Vol. 13 No. 3, pp. 236-248. https://doi.org/10.1108/CG-12-2010-0107