Ownership structure in banks influences corporate governance, corporate strategy and performance

Researchers from the University of Embu explored a critical question, whether ownership structure is a key component in enhancing financial performance of banks, especially in Kenya, a developing economy considered as overbanked. Peter Njagi Kirimi a Ph.D. student, Dr. Samuel Nduati Kariuki and Dr. Kennedy Nyabuto Ocharo from the School of Business and Economics examined the relationship between ownership structure and financial performance of commercial banks in Kenya by analyzing data from 39 commercial banks for the period 2009–2020.

Strong evidence on ownership structure was found to explain the differences in commercial banks’ financial performance. The study established that the greatest influence of ownership structures was on net interest margin at 53.04% and return on assets at 31.37%. Influence of ownership structures was found to be low on return on equity at 3.32% and earnings per share at 2.13%. The study reports a negative association between state ownership and net interest margin, negative association between management ownership and both net interest margin and earnings per share, negative association between institutional ownership and return on assets and a negative association between foreign ownership and earnings per share.

Based on the findings, the researchers recommended commercial banks to vary their ownership structures to boost financial performance. Secondly, banks with high percentage of state ownership should consider partial privatization to improve corporate governance practices. Third, banks should adopt managerial ownership policy limiting the proportion of equity stock on executives to limit their powers in strategic decision making. Fourth, the study proposes a percentage limit on equity stock of an individual institutional investor. Lastly, the study proposes that bank’s management to come up with a policy detailing the role and place of foreign investors in strategic decision making to ensure their presence in every decision undertaken by bank managers.

The results of this study are published in PLoS ONE journal (https://doi.org/10.1371/journal.pone.0268301) under the title, “Ownership structure and financial performance: Evidence from Kenyan commercial banks”

The authors have published additional papers from the study on commercial banks in Kenya which can be accessed online using the reference links below:

1. Kirimi, P.N., Kariuki, S.N. and Ocharo, K..N. (2022), “Financial soundness and performance: evidence from commercial banks in Kenya”, African Journal of Economic and Management Studies (https://doi.org/10.1108/AJEMS-11-2021-0499).
2. Kirimi, P.N., Kariuki, S.N., and Ocharo, K. N. (2022). Moderating effect of bank size on the relationship between banks’ financial soundness and financial performance. African journal of economics and management (https://doi.org/1108/AJEMS-07-2021-0316).