Relationship between selected risk governance mechanisms, board oversight and financial performance of commercial banks in Kenya

Abstract

Commercial banks in any country play critical role in the growth of the economy. The shareholders and stakeholders expect the banks to yield good financial returns. However, performance of banks in Kenya has been declining leading to their collapse or receivership. This may be attributed to many factors including risk exposure. In bid to protect the financial sector, Central Bank of Kenya directed all the banks to manage risks by implementing risk governance mechanisms. However, limited knowledge exists on the relationship between risk governance mechanisms and financial performance of financial institutions owing to limited studies and also no study has attempted to investigate whether board oversight has a moderating effect on the relationship between risk governance mechanisms and financial performance. This study therefore sought to establish the relationship between risk committee existence, audit and credit committee sizes, number of risk governance mechanisms and financial performance of commercial banks in Kenya and it also established the moderating effect of board oversight on the relationship between risk governance mechanisms and financial performance of commercial banks in Kenya. The study is significant to financial institution management, Central Bank of Kenya, Scholars and the government. The target population was all the 42 commercial banks operating in Kenya. The study adopted longitudinal research design covering a period of five years (2013 - 2017). The study used secondary data extracted from annual audited financial statements and reports of commercial banks. Regression analysis and multicollinearity tests were carried out using SPSS. The study found a significant positive relationship between risk governance mechanisms: risk committee existence, credit committee size, number of risk governance mechanisms and financial performance. The findings showed a coefficient of regression of r=0.376, R 2= 0.142, p˂0.05. This indicates that 14.2% of the change in financial performance is explained by the risk governance mechanisms. After introduction of the moderator first measured by board size, change in R 2 became 0.076, p˂0.05 indicating a significant moderating effect of board size on the relationship between risk governance mechanisms and financial performance. However, when frequency of board meetings was used as a moderator, change in R 2= 0.006 with significance level of p˃0.05 was established indicating that there was no significant moderating effect of frequency of board meetings on the relationship between risk governance mechanisms and financial performance. The study concludes that risk committee existence, credit committee size, number of risk governance mechanisms have a significant positive relationship with financial performance of commercial banks in Kenya, audit committee size is not significantly related to financial performance, board size has a significant moderating effect on the relationship between risk governance mechanisms and financial performance while frequency of board meetings does not have a significant moderating effect on the relationship between risk governance mechanisms and financial performance. The study recommends commercial banks to focus on risk governance mechanisms so as to manage risk exposure thus enhancing financial performance.