BOARD CHARACTERISTICS AND PROFITABILITY OF TIER III COMMERCIAL BANKS IN KENYA
BOARD CHARACTERISTICS AND PROFITABILITY OF TIER III COMMERCIAL BANKS IN KENYA
Francis Ngugi Muigai - Masters Student, Kenyatta University, Kenya
Dr. Moses Odhiambo Aluoch - Lecturer, Kenyatta University, Kenya
ABSTRACT
The study assessed the impact of corporate governance attributes on the profitability of Tier III commercial banks in Kenya. Despite their vital role in fostering economic growth and providing financial services, these banks continue to face persistent profitability challenges. The research examined key governance factors, including board independence, gender diversity, board size, audit committee structure, and directors' educational backgrounds, to determine their influence on financial performance. The study was anchored in several theoretical frameworks, including Agency Theory, Resource Dependence Theory, Organizational Theory, Audit Quality Theory, Human Capital Theory, and Stakeholder Theory. Using quantitative methods, including descriptive and correlational analysis, the study analysed data from the annual reports of Tier III banks in Kenya covering the period from 2018 to 2023. The findings indicated that board independence and gender diversity were positively correlated with financial performance, suggesting that autonomous boards and diverse leadership enhance decision-making and accountability, leading to improved profitability. Additionally, a well-structured audit committee played a significant role in financial performance, highlighting the importance of effective oversight and expertise in risk management and regulatory compliance. However, the study found no significant relationship between board size or directors' educational backgrounds and profitability, suggesting that the composition and functional effectiveness of the board are more critical than its size or formal qualifications in driving financial success. Based on these findings, the study recommended that Tier III banks enhance board independence, increase gender diversity, and strengthen the structure and expertise of their audit committees to improve profitability. Furthermore, the study identified potential areas for future research, including the impact of digital transformation, corporate social responsibility, and long-term governance reforms on the financial performance of banks. This research contributes valuable insights into corporate governance practices that can enhance financial outcomes for banks in emerging markets, particularly in Kenya.
