THE INFLUENCE OF BOARD STRUCTURE ON THE FINANCIAL PERFORMANCE OF TIER THREE COMMERCIAL BANKS IN NAKURU COUNTY, KENYA

Abstract

The banking sector pre-tax profits declined by 14.7 per cent in the year to June 2017, largely reflecting an 18.5 per cent fall in earnings on advances, which constituted 54.4 per cent of total income. The Return on Assets and Return on Equity decreased from 3.5 per cent and 33.8 per cent, respectively in June 2016 to 2.8 per cent and 22.3 per cent by June 2017(CMA,2018). The deterioration is attributed to the significant decline in the sector’s profitability. Consequently, this study focuses on determining the role of board structure on the financial performance of tier three commercial banks. This study focus seeks to investigate the relationship that exists in tier three commercial banks which the study did not cover. This study sought to examine the influence of board structure on the financial performance of tier three commercial banks in Nakuru County, Kenya. The study used descriptive survey research design. The target population was 22 Finance Managers of the 22 tier three commercial banks in Nakuru County, Kenya. The study employed census technique to include all the 22 respondents since the population was relatively small. These populations are chosen due to their availability of finance managers in these institutions and also accessibility. Secondary data on return on asset and return on equity was also gathered from the financial statements and annual reports of the companies. The secondary data was obtained from annual reports of the tier three commercial banks and financial statements of the 22 tier three commercial banks. From the correlation results the study showed a strong positive significant relationship that led to the rejection of the null hypothesis and subsequently the adoption of the view that board structure was instrumental in ensuring effective financial performance of tier three commercial banks in Nakuru County, Kenya. The study recommended that the there is need of maintaining CEO duality as it positively influences the financial performance of the Tier three commercial bank. In addition, large boards should be maintained as it enhances financial performance. However, the boards should be dominated by non-executive directors, as this it enhances firm value.