Board characteristics, capital adequacy and financial performance of commercial banks in Kenya

Abstract

Kenyan commercial bank play a significanct role in stimulating the economy by balancing financial transactions between deficit and surplus sectors. However, profitability has faced challenges due to several factors such as corporate governance, interest rate cap and non performing loans. The banks return on assets declined marginally between 2022 and 2023 highlighting governance challenges. This situation necessitates the need for the current investigation to establish whether board attributes have a noteworthy effect on the financial performance of commercial banks in Kenya. Determining how board characteristics (board size, meetings, and gender diversity) affect the financial performance of commercial banks in Kenya is the primary goal of this inquiry. The target population was all 46 commercial banks in Kenya and a data collection worksheet was used to collect secondary data from audited reports and the bank's financial records between 2014 and 2023. The secondary data collected wasanalyzed using panel data regression and the outcome was displayed in tables and line graphs. Findings indicated that board meetings and board size have insignificant (ρ=0.262; ρ=0.621) effects on the banks' financial performance with that of board meeting been positive (β=.0040729) while size been negative (β=- .0036218). However, board gender diversity revealed a significant positive (β=.1328822, ρ=0.023) effect on the bank’s financial performance. Capital adequacy has an insignificant positive (β=.03292, ρ=0.833) moderating effect on the relationship between board characteristics and commercial banks’ financial performance in Kenya. These finding suggests that increased gender diversity enhances decision-making, and perspectives, yielding measurable financial benefits. The study recommends that central banks should enact policies mandating a minimum gender diversity threshold (e.g., 30% female representation), implemented through binding guidelines requiring banks to report board composition annually to the Central Bank of Kenya, with non-compliance triggering penalties such as increased capital reserve requirements.