Impact of Ownership Concentration on Financial Performance of Commercial Banks in Kakamega County, Kenya.

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Mugambi J. E,Otinga H, Miroga J

Abstract

Financial scandals and major accounting failures in Kenya commercial banks have focused the minds of
governments, bank regulators, investors, bank shareholders and the general public on weaknesses in internal
corporate governance systems and the need to address this issue. In the Kenyan context, there have been cases
involving corporate scandals and cash fraud for instance the cases involving the collapse of the Euro Bank in 2004,
financial flaws in National Bank of Kenya and the board room wrangles plus the discovery of secret overseas bank
accounts for siphoning company money by some directors in commercial banks in Kenya. This raised questions on
the effectiveness of internal corporate governance systems such as ownership concentration on financial
performance of commercial banks in Kenya.The study therefore sought to investigate the effect of ownership
concentration on financial performance of commercial banks in Kakamega County, Kenya. The study was hinged on
the stakeholder’s theory and the agency theory. The study adopted explanatory design and targeted all the
11commercial banks in Kakamega County, Kenya, and used self-administered structured questionnaires to collect
primary data from 98 senior management employees of commercial banks in Kakamega County, Kenya. Both
descriptive and inferential data analyses were conducted whereby; descriptive analysis involved computations of
frequencies, percentages, mean and standard deviation while inferential analysis involved computation of correlation
and regression analysis. Data analysis was computed by the Statistical Package for Social Scientists version 24
software and analyzed data was presented in form of tables and graphs. A total of 90 out the targeted 98 respondents
returned completely filled questionnaires representing a response rate of 91.8%, thus suitable for generalizability of
research findings to a wider population. The study through both descriptive and inferential analysis revealed that
ownership concentration was a significant predictor of financial performance of commercial banks in Kakamega
County, Kenya. That is; ownership concentration (β=0.309 at p<.001); and from the model summary, R2 = 0.404
implying that 40.4% of variation in the dependent variable (financial performance as measured by ROE) is
explained by the independent variable (ownership concentration). The study concludes that since ownership
concentration was found to be a significant predictor of commercial banks’ financial performance, policy makers in
the banking industry should encourage more domestic and foreign shareholding while minimizing state ownership in
commercial banks, so as to boost financial performance of commercial banks in Kenya.

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