Abstract:
Bank financial performance is a major concern in developing countries because
financial markets are usually under developed. Banks are therefore, considered the
major source of finance for the majority of firms and main depository of economic
savings. The poor performance of the banking sector has resulted to frequent distress
in the banking sector and collapse of banks. Studies have documented that CAMELS
framework are associated with financial performance, but little is known about the
moderating mechanism underlying the relationship between CAMELS framework,
Board Financial Expertise and financial performance of commercial banks. The
purpose of this study was to determine the moderating effect of board financial
expertise on the relationship between CAMELS frameworks and financial performance
of commercial banks in Kenya. The study specific objectives were to determine the
effect of capital adequacy, asset quality, management efficiency, earnings quality,
liquidity and sensitivity of market risk on financial performance of commercial banks
in Kenya. The study was guided by Resource Based view, Upper Echelon Theory,
Human Capital theory and Efficiency Structure theory. Both explanatory and
longitudinal research design were adopted while the study targeted all commercial
banks from 2010 to 2020. The data collected was analyzed using a hierarchical multiple
regression model. A panel regression analysis results indicated that capital adequacy (β
= .0971, ρ<.05, asset quality (β = .592, ρ<.05), (β = .58, ρ<.05), earning quality (β =
.343, ρ<.05) and liquidity (β = .973, ρ<.05) had a positive and significant effect on
financial performance of commercial banks in Kenya. Sensitivity of market risks (β =
-.62, ρ<.05), had a negative and significant effect on financial performance of
commercial banks in Kenya. However, firm size (β = - .832, ρ>.05) and firm age (β2 =
.399, ρ>.05) had no significant effect on financial performance of commercial banks in
Kenya. Further, Board financial expertise positively moderated the relationship
between capital adequacy (β=2.95, ρ>.05), asset quality (β= 0.02, ρ>.05), management
efficiency (β= .28 ρ>.05) and financial performance of commercial banks in Kenya.
The study concluded that capital adequacy, asset quality, and management efficiency
are key predictors of financial performance of commercial banks in Kenya. In addition,
board financial expertise is an enhancing moderator in both liquidity and sensitivity in
relation to financial performance of commercial banks in Kenya. On the contrary, board
financial expertise is a buffering moderator in the relationship between earning quality
and financial performance of commercial banks in Kenya. The study recommended that
commercial banks have adequate levels of capital. Also, to improve bank financial
performance through asset quality, it is important to focus on key areas such as credit
risk, interest rate risk, and operational risk. Further, there is a need for the board to
ensure that the management team has the financial expertise necessary to make sound
decisions. Additionally, it is important to improve the financial expertise of the board
so that they can provide better oversight of the bank's financial operations and help to
enhance the financial performance. Finally, banks can tackle the sensitivity of market
risk and improve their financial performance by hedging their portfolios, managing
their liquidity, and stress-testing their portfolios.