Effect of banks’ ownership structure on financial performance: evidence from banks in an emerging market

Abstract

Purpose This study aims to examine the effect of ownership structure on financial performance of commercial banks in Kenya. Design/methodology/approach The data were collected from audited financial statements of 39 commercial banks in Kenya for the period 2009–2020. Findings Regression results found evidence of ownership structure explaining commercial banks’ financial performance. The results found a negative association between state ownership and net interest margin, a negative association between management ownership and net interest margin and a negative association between institutional ownership and return on assets. Practical implications Based on the findings, commercial bank management should therefore devise ownership structure policies that are geared toward boosting their financial performance both in the short run and the long run. Second, this study recommends a minority shareholding of the state in commercial banks to deter political interference, protect investors’ wealth from erosion and allow the majority shareholders to adopt a strong corporate governance mechanism for higher financial performance. Banks with a high percentage of state ownership should consider partial privatization to improve corporate governance practices. Third, banks should adopt a managerial ownership policy limiting the proportion of equity stock held by executives to limit their powers in strategic decision-making. Fourth, this study proposes a percentage limit on the equity stock of an institutional investor to eliminate bureaucracy in strategic decision-making and protect investors’ wealth. Originality/value The study finding is meant to inform regulation and operation policies in the banking sector and contribute to the literature on ownership structure, especially in the banking sector.