The Effects of Corporate Governance, Financial Efficiency on Commercial Banks Financial Performance: Evidence from Kenya

Abstract

Corporate governance and financial efficiency have increasingly become essential determinants of commercial banks, profitability and stability in emerging markets. We examined the effects of corporate governance and financial efficiency of Kenyan banks over a period 2015-2024. Secondary panel data obtained from audited annual reports of commercial banks and Central Bank of Kenya (CBK) supervision reports and Kenya Bankers Association (KBA) publications was analyzed. The study employed two step system Generalized method of Moments (System GMM) estimator with windmeijer-corrected robust standard errors to address endogeneity and capture the dynamic nature of banks’ financial performance. The results produced a significant persistent banks profitability which indicated that the current financial performance is influence by the precious performances. Financial efficiency exerts a positive and statistically significant effect on return on asset(ROA) indicating that efficient resource utilization enhances asset based profitability in commercial banks. However, the influence of Financial efficiency on return on equity remains statistically weak implying that shareholders return may act difference to efficiency enhancements in short term. Furthermore, Interest on deposits negatively affects net interest Margin(NIM) suggesting a reduction in interest based earnings. Corporate governance mechanisms demonstrate mixed effects on financial indicators thus proves that effectiveness of governance practices varies depending on the Financial performance dimension chosen. The study extends the banking and governance literature by examining the joint role of corporate governance and financial efficiency in shaping commercial banks’ financial performance an emerging market setting using dynamic panel estimation techniques