Academic journal article The International Journal of Business and Finance Research

Influence of the Capital Markets Authority's Corporate Governance Guidelines on Financial Performance of Commercial Banks in Kenya

Academic journal article The International Journal of Business and Finance Research

Influence of the Capital Markets Authority's Corporate Governance Guidelines on Financial Performance of Commercial Banks in Kenya

Article excerpt

ABSTRACT

Good corporate governance is indispensable for the survival and performance of corporate entities. The purpose of the Capital Markets Authority's (CMA) Guidelines on good corporate governance was to improve governance practices in the corporate sector, as well as attract and retain investors for sustained economic growth. A rampant trend of commercial banks placed under receivership between 1990 and 2005 inspired this study. As at the time of the study, the Guidelines had been operational for about eight years. Although statistics at that time suggested that the banking sector had improved by reducing the proportion of non-performing loans, there was no documentation linking the Guidelines to this achievement. I sourced primary data from 16 commercial banks, seven of which traded at the Nairobi Stock Exchange (NSE). I applied one-way Analysis of Variance (ANOVA), Pearson's Correlation Coefficient and multiple regression models to analyze the data. The results show that listed and unlisted commercial banks were significantly different in terms of board size, proportion of executive and non-executive directors, gender composition, cost of board maintenance, composition of audit committees, frequency of financial disclosures and more importantly, financial performance. The study emphasizes the need for a legal framework to enforce alignment with CMA Guidelines to safeguard members of the public from losing their savings and also ensure stability of the financial sector to enable the country attain targeted economic growth at 10 percent per annum.

JEL: O16

KEYWORDS: Capital Markets, Corporate Governance, Financial Performance, Listed Banks, Unlisted Banks

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Good corporate governance has become a subject of global interest because corporate entities play a vital role in promoting economic development through employment, wealth creation, as well as goods and services. Besides, good corporate governance is a pre-requisite for effective financial performance and greater autonomy (Matama, 2008; Colpan, Yoshikawa, Hikino and Miyoshi, 2007). In 2002, the Capital Markets Authority (CMA) developed a set of Guidelines on corporate governance to guide Kenyan listed companies in streamlining their corporate governance practices. The Guidelines were formulated in accordance with the provisions of sections 1 1(3) (v) and 12 of the Capital Markets Act (Cap. 485A). The Guidelines were also developed in response to the growing importance of corporate governance in promoting the growth of domestic and regional capital markets through better financial performance, capital formation and maximisation of shareholders' value (CMA, 2002; Matama, 2008).

Various management scholars have defined the concept of corporate governance in different ways. For instance, Fourier (2006) states that corporate governance is the tendency of leaders to conduct business within acceptable ethical standards. Abu-Tapanje (2005) explains that corporate governance promotes fair, efficient and transparent management of institutions to meet well-defined objectives through effective practices and structures. According to the CMA Guidelines, corporate governance is the process of managing business affairs of an institution to achieve financial prosperity, accountability and improve shareholders' long-term value (CMA, 2002). The overall objective of the CMA Guidelines is to strengthen corporate governance practices among listed companies in Kenya. In this regard, the directors of such institutions should comply with good corporate governance practices, as part of their obligations to sustain their listing at the Nairobi Stock Exchange (NSE) market. The Guidelines outline various corporate governance principles, touching on structure and functions of the board of directors; the rights and responsibilities of shareholders; auditing and accountability, as well as public disclosure. …

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