Moderating effect of board financial expertise on camels framework and financial performance of commercial banks in Kenya

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.