The Intervening Effect of Risk Management on the Relationship between Corporate Governance and Financial Performance of Commercial Banks in Kenya

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Author(s): Dr. Herick Ondigo

Abstract

Corporate Governance, Risk Management and Financial performance are important concepts for effective bank management. To this end, the Basel Accord, the Central Banks and Capital Market Authorities of different jurisdictions have overtime issued guidelines on Corporate Governance and Risk Management to ensure proper functioning of the financial system that maximizes shareholders wealth as well as satisfying the interest of other stakeholders .Despite the legislative and regulatory interventions,  banks have failed to operate above board forcing the regulators to apply drastic measures to restore sanity in the financial system. The objective of the study was to assess the effect of Risk Management on the relationship between Corporate Governance and Financial Performance of commercial banks in Kenya. Previous studies have used different performance indicators used to evaluates financial performance of commercial banks. This study adopted the CAMEL rating system that analyses performance based on five indicators; capital adequacy, asset quality, management quality, earnings, and liquidity of Banks. The CAMEL system has become important tool of measuring the overall soundness and safety of banks in the light of global financial crisis and bank failures. The Baron and Kenny (1986) approach was used to test the intervening effect of Risk Management on the relationship between Corporate Governance and Financial Performance. The study was guided mainly by the Agency theory and used a cross sectional descriptive research design. The population consisted of 43 commercial banks registered in Kenya as at 31st December 2014. Descriptive statistics and diagnostic tests were conducted on the primary data thereafter inferential statistics namely correlation analysis and regression analysis were used to test the hypotheses. The finding of the study was that the intervening effect of Risk Management on relationship between Corporate Governance and attributes of Bank Financial Performance was inconclusive. The study recommends that regulators, boards and management of commercial banks to ensure congruence in their oversight, implementation and monitoring with corporate objectives to enhance improved bank Financial Performance and value maximization.

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