Ownership Structure and Financial Performance: Evidence From Kenyan Commercial Banks

PLOS ONE
RESEARCH ARTICLE
Ownership structure and financial

performance: Evidence from Kenyan
commercial banks
Peter Njagi Kirimi ID1*, Samuel Nduati Kariuki ID1☯, Kennedy Nyabuto Ocharo2☯
1 Department of Business Studies, School of Business and Economics, University of Embu, Embu, Kenya,
2 Department of Economics, School of Business and Economics, University of Embu, Embu, Kenya
a1111111111 ☯ These authors contributed equally to this work.

a1111111111 * Pnjagi06@gmail.com
a1111111111
a1111111111
a1111111111 Abstract
The study examined the relationship between ownership structure and financial perfor-
mance of commercial banks in Kenya for the period 2009–2020. The data were collected
from audited financial statements of 39 commercial banks in Kenya. Regression results
OPEN ACCESS
found strong evidence on ownership structures in explaining the differences in commercial
Citation: Kirimi PN, Kariuki SN, Ocharo KN (2022)
banks’ financial performance. The results established that the greatest influence of owner-
Ownership structure and financial performance:
Evidence from Kenyan commercial banks. PLoS ship structures was on net interest margin at 53.04% and return on assets at 31.37%. Influ-
ONE 17(5): e0268301. https://doi.org/10.1371/ ence of ownership structures was found to be low on return on equity at 3.32% and earnings
journal.pone.0268301
per share at 2.13%. The results found a negative association between state ownership and
Editor: Ricky Chee Jiun Chia, Universiti Malaysia net interest margin, negative association between management ownership and both net
Sabah, MALAYSIA
interest margin and earnings per share, negative association between institutional owner-
Received: November 7, 2021 ship and return on assets and a negative association between foreign ownership and earn-
Accepted: April 26, 2022 ings per share. Based on the findings, commercial banks should vary their ownership
structures to boost financial performance. Secondly, banks with high percentage of state
Published: May 20, 2022
ownership should consider partial privatization to improve corporate governance practices.
Peer Review History: PLOS recognizes the
Third, banks should adopt managerial ownership policy limiting the proportion of equity
benefits of transparency in the peer review
process; therefore, we enable the publication of stock on executives to limit their powers in strategic decision making. Fourth, the study pro-
all of the content of peer review and author poses a percentage limit on equity stock of an individual institutional investor. Lastly, the
responses alongside final, published articles. The
study proposes that bank’s management to come up with a policy detailing the role and
editorial history of this article is available here:
https://doi.org/10.1371/journal.pone.0268301 place of foreign investors in strategic decision making to ensure their presence in every deci-
sion undertaken by bank managers.
Copyright: © 2022 Kirimi et al. This is an open
access article distributed under the terms of the
Creative Commons Attribution License, which
permits unrestricted use, distribution, and
reproduction in any medium, provided the original
author and source are credited. 1. Introduction
Data Availability Statement: All relevant data are Firms use many tools to enhance and promote their performance. Ownership structure is one
within the manuscript and its Supporting of the major tools applied to enhance performance in many firms across the globe [1]. To
information files. enhance financial planning in many firms, ownership structure is a vital component and is
Funding: The author(s) received no specific used by many firms’ directors [2] since any firm’s board efficiency hangs on the overall diver-
funding for this work. sity of the ownership structure [3]. Ownership structure represents a powerful means for the
PLOS ONE | https://doi.org/10.1371/journal.pone.0268301 May 20, 2022 1 / 20

PLOS ONE Ownership structure and financial performance
Competing interests: The authors have declared firm’s management to exercise control to improve performance [4]. This is because different
that no competing interests exist. ownership structures can be applied in countering the agency problems, thereby boosting the
relationship between the firm’s management and other stakeholders of the firm.
Globally, the relationship between ownership structure and financial performance has been
of primary concern to scholars, management, academics, policy makers and investors for
decades. This concern comes from the fact that ownership structure influences firm’s corpo-
rate governance on major decisions thereby impacting on the firms’ financial performance.
The authors in [5] argued that this relationship depends on the various types of ownership
structures that exist in different firms. Ownership structure and performance is a contentious
issue that has been a subject of debate in all businesses globally [6]. Ownership structure
reveals the distribution of equity in a firm and the identity of the equity owners [7]. Board
decisions are influenced by corporate governance mechanisms which are based on ownership
structures in place by firms. Ownership structures lead to agency problems resulting from con-
flicts between management and shareholders. As noted by [8], this conflict lowers the value of
the firm when managers put their interest before those of the owners.
Ownership structure of a firm plays a great role in decision making and cost control [9].
The form of ownership structure in a bank dictates and provides the level of influence and con-
trol one has on management of the bank in making vital decisions. Ownership structure in
banks influences corporate governance, corporate strategy and performance [10]. In the con-
text of the agency theory, the study explored a critical question, whether ownership structure is
a key component in enhancing financial performance. This question impelled the study to
focus on two expectations. The first was to establish the role of ownership structure in enhanc-
ing the firm’s performance. The second was to fill the related gap in literature relating to the
relationship between ownership structure and financial performance, especially in the Kenyan
banking context.
This paper contributes to literature in many ways. First, the study investigates the relation-
ship between ownership structure and financial performance of commercial banks in Kenya, a
developing market economy considered as overbanked. This was due to the fact that there is
no agreement from empirical results on the relationship between ownership structure and
banks’ financial performance. For example, authors in [11] found that ownership structure
had no influence on performance. In another study [12] authors found evidence that owner-
ship structure positively determined Asian banks’ profitability. Moreover, it was established
that ownership structure impacted on Chinese banks’ overall performance positively [13]. This
study aims at solving this controversy by presenting evidence from a developing economy
through investigating the relationship between ownership structure and financial performance
using data from the commercial banking sector in Kenya.
Secondly, Kenya ranked very low in provision of investor protection compared to other
developing and developed market economies globally. The strength of the last investor protec-
tion index carried out in Kenya stood at 5.3% [14]. The findings would benefit policymakers
by assisting bank management to enhance financial performance through modification of
ownership structure to influence governance decisions and investor protection policies.
Thirdly, to the best of our knowledge, there is no study that has investigated the effect of own-
ership structure on banks’ financial performance in Kenya using a wider scope of four finan-
cial performance measures. The finding of this study therefore equips policymakers and
lawmakers with ownership structure knowledge required to formulate policies for improving
financial performance in commercial banks.
The remainder of this paper is organized as follows: section 2 presents the background, sec-
tion 3 discusses theoretical and empirical literature review and hypotheses development.

Section 4 presents the methodology and section 5 presents empirical results and discussion.
Finally, section 6 presents the conclusions, recommendations and suggestions for future study.
1.1 Background
Kenya like other emerging economies is classified as developing. Through the decades Kenya
has walked through the path to a free market economy with economic policies aimed at
improving investment opportunities. Due to this, the Kenyan economy has witnessed an
increase in number of banks which has led Kenya being classified as one of the overbanked
developing economy. To ensure that the Kenyan banking sector remained financially sound,
the Kenyan government came up with mechanisms to monitor banking operations through
the Central Bank of Kenya (CBK) which emphasized on adherence to BASEL Accords that
lays down measures to ensure minimum liquidity and capital requirements are met. The CBK
also came up with prudential guidelines to protect depositor’s funds. For example, the passing
of the 1989 Banking Act introduced banking regulations that govern commercial banks’ opera-
tions after 9 banks had collapsed. However, this did not solve the problem as six more banks
collapsed before 1998. Between 2007–2015, four banks, that is, Kenya Finance Corporation,
Trade bank, Euro bank and Charter House bank collapsed. The collapse of these banks was
mainly attributed to poor governance structures which led to a decline in financial perfor-
mance [15, 16]. In addition, between August and October 2015, Dubai bank and Imperial
bank were put under statutory management.
In the last decade, Kenya has witnessed an increased rate of mergers and acquisitions in the
banking sector with recent cases witnessed in years 2019 and 2020. For example, the merger
and acquisition between Commercial Bank of Africa Limited (CBA) and NIC Group PLC was
completed in September, 2019. Kenya Commercial Bank acquired 100 percent shareholding of
National Bank of Kenya in September, 2019. In the year 2020, Access Bank PLC acquired
Transnational Bank PLC and Commercial International Bank of Egypt acquired 51 percent
shareholding of Mayfair Bank Ltd. During the same year Kenya Commercial Bank acquired
part of Imperial Bank’s assets which were valued at KES 3.2 billion and assumed liabilities of
the same value. Still in the year 2020, the Co-operative Bank of Kenya Ltd acquired 90 percent
equity of Jamii Bora Bank.
The mergers and acquisitions were influenced by the decline in banks’ performance result-
ing from ineffective governance mechanisms that were put into place by the management. For
example, the CBK’s annual supervision report noted that the banking industry experienced a
sharp decline on its profitability by 9.6% in the year 2017 [17]. Later in the year 2019, the pre-
tax profits of the sector decreased by 29.3% from KES 159.1 billion in December 2019 to KES
112.1 billion in December 2020. The decrease in profitability was attributed to a higher growth
in total expenses.
With erosion of consumer confidence in small and mid-sized banks, large commercial
banks that control an estimated 80% of the market in Kenya could become even more domi-
nant by acquiring the businesses of small and mid-sized banks that face governance challenges
leading to poor financial performance [18]. Majority of banks in developing economies includ-
ing Kenya have issues with corporate governance due to ownership structures. These gover-
nance issues range from inadequate protection of banks’ investors, management transparency
problems to agency problems. These issues are due to lack of adequate oversight and consis-
tency in rules, leading to many corporations suffering market deficiency [19]. Firms are unable
to sustain their market operations and access additional capital. In addition, investments by
minority equity holders would be affected by large shareholders who influence and have
authority to influence decisions. Therefore, this study anticipated that ownership structure as

corporate governance tool, would play a vital role in influencing banks’ financial performance
through shielding equity holders’ investments.
2. Theoretical literature review

2.1 The agency theory
The agency theory which is widely used as the basis for corporate governance studies dates
back to the work of [20] and later developed by [9]. The theory suggests that there exists an
agency problem between the principal and the agent which leads to agency costs. This
dilemma exists where managers acting as agents of equity holders are motivated to act in their
own best interests, which are contrary to those of the owners [21]. In most cases, managers are
influenced to act contrary to owners’ expectations which affect firms’ financial performance
[22]. To counter the agency problem, both shareholders’ and managers’ interests should be
aligned with the objectives of the firm. For better firm’s performance, reference [23, 24] sug-
gest provisions of effective ownership structures that are aimed at lowering agency costs
through control of management decisions. Agency problems are themselves motivators of
ownership structures in many firms [25] and therefore act as the turn point for corporate gov-
ernance debates among board of directors and firms’ management. A study by [26] found that
ownership structure in firms helps to reduce agency costs by regulating how a company is
managed. Other studies proposed the refraining approach such as assigning a portion of share-
holding to top managers and setting up of independent audit committees [27–30]. This
approach is expected to help align manager’s interest with that of owners as well as engaging in
beneficial and profitable business activities.
2.2 Empirical literature and hypothesis development

Commercial banks have a central position and play a great role in the financial system [31].
The operations of banks are put in check by many stakeholders ranging from government reg-
ulators, investors as well as bank owners. Banks’ operations are as a result of governance struc-
ture put into place. An ownership structure as a major tool for determining corporate
governance has been a subject of debate by researchers for decades. Ownership structure sets
up how equity is distributed in a firm and through this the identity of equity owners and their
voting power is revealed [7]. The performance of every firm is affected by various classes of
shareholders due to their differences in strategic decision making powers [32]. Before the
financial crisis hit business in 2008, ownership structure had played a vital role in boosting up
financial performance [33]. In addition [33], provided firm regulators with an understanding
of improving corporate governance practices. After the financial crisis of 2008, scholars and
researchers across the globe relooked at the relationship between ownership structure and
financial performance as ownership structure was viewed as a major tool in enhancing recov-
ery both in the financial and non-financial sectors [23, 26, 34–36]. In today’s businesses where
separation of ownership and management is emphasized, managers of firms are tasked with
the control of all major strategic decisions. In this way they are expected to have implications
on the validity of the wealth-maximizing goal of the firm. Commercial banks however, are not
exception from this rule. In making strategic financial decisions, bank managers may pursue
their interests resulting to poor financial performance. It is for this reason that [6] found that
ownership structure and performance is an issue that has been a subject of debate for a long
time. Ownership structure plays a vital role in decision making and control [9]. From this
early notion, the form of ownership structure in a bank dictates and provides the level of influ-
ence and managerial control in critical decisions making especially those pertaining to bank’s
corporate governance practices. This study sought to investigate the association of ownership

structure on financial performance of commercial banks and focused on four dimensions of

ownership structure aimed at reducing the agency problems. These four dimensions formed
the basis for hypotheses development.
2.2.1 State ownership and financial performance. As posited by [37], state ownership of
commercial banks is ineffective due to political interference, weaker managerial incentives
compared to privately owned banks and weak monitoring efforts of government. Political
interference conflicts with firm objectives of profit maximization resulting to poor financial
performance of commercial banks. Prior empirical studies found that state owned banks
exhibit lower financial performance associated with weaker corporate governance and risk lev-
els that are very high [38–40]. In addition, Lee and Kim [41] established a negative relationship
between state ownership and financial performance in the Korean banking sector. This finding
was later confirmed in the Chinese banking sector by [42] who established that poor perfor-
mance was associated with state ownership. However, these results contradicted the work of
[43] who found a positive relation between state ownership and financial performance of com-
mercial banks. A more recent study also found a positive relation between state ownership and
financial performance of banks in Yemen [44]. On the other hand, study by [45] found no dif-
ference in performance between state-owned banks and privately owned banks in Africa. This
finding was later supported by [46]. Empirical evidence from the studies reviewed on the rela-
tionship of state ownership on financial performance show that scholars do not agree on a
common finding. Therefore, this study sought to examine the relationship between state own-
ership and banks’ financial performance by speculating the following:
H01: There is no association between state ownership and financial performance of Kenyan
commercial banks.
2.2.2 Managerial ownership. Managerial ownership is the proportion of shares that is

owned by the executives. Managerial ownership as explained by the agency theory is one of the
techniques used to reduce agency problems. According to [9] managerial ownership is applied
to improve the value of the firm attained through an increased financial performance. The sep-
aration of ownership and control is a subject of concern to many researchers as empirical stud-
ies show mixed findings on the relationship between managerial ownership and financial
performance. According to the convergence-of-interests hypothesis, an increase in managerial
ownership can reduce agency problems drastically [9]. However, the entrenchment hypothesis
proposed that a higher level of management ownership in a firm decreases the firm’s perfor-
mance associated with more voting power by executives to control strategic decision-making
[47]. Empirical results have established that management ownership has a positive impact on
financial performance. For example [32], found that an increase in management ownership
positively impacted on firm’s performance in Jordan. This finding was also echoed by
authors in studies by [36, 48, 49]. A more recent study by [2] agreed with the earlier
findings that increasing the executive shareholding increases financial performance. In addi-
tion, a study by [50] found that managerial ownership exerted a positive effect on financial
performance in Thai firms. Further [51], observed that management ownership is a structure
that supports both the interests of shareholders and managers to enhance performance of a
firm.
In contrast, other studies supported the entrenchment hypothesis, that is, management
ownership negatively relates to firm’s performance [47, 52–54]. In addition, studies by [55, 56]
found a significant and negative relationship between managerial ownership and
commercial banks’ financial performance in United States of America and Australia

respectively. Further [57], established a significant negative effect of managerial ownership on

bank performance.
Based on the literature reviewed, this study examined the role of management ownership in
the performance of the Kenyan commercial banking sector. The following null hypothesis was
formulated;
H02: Management ownership does not influence financial performance of commercial banks
in Kenya.
2.2.3 Institutional ownership. Institutional ownership is another tool used to mitigate

the impact of agency problems where large individual shareholders make decisions for their
own interests at the expense of minority stockholders. Institutional ownership is described as
ownership of huge stock in a firm by other institutions [58]. This ownership is associated with
high financial performance as a result of high quality management and improved corporate
governance [2, 59]. Corporate governance in a firm can be strengthened by institutional own-
ership [60]. A study by [61] asserts that increasing the portion of institutional ownership pre-
vents managerial fraud. Institutional investors holding a proportion of capital for some time in
a firm acquires high level of knowledge that allows them to perform their monitoring role
effectively [59]. However, previous empirical studies found mixed conclusions. Some studies
established a positive relationship between institutional ownership and firms’ financial perfor-
mance [51, 62–67]. Other studies observed a negative association between institutional owner-
ship and financial performance [68, 69]. On the basis of the literature presented here, the
following hypothesis was formulated;
H03: Institutional ownership has no relationship with financial performance of Kenyan com-
mercial banks.
2.2.4 Foreign ownership. Foreign ownership is another ownership structure known to

influence corporate governance in firms. Foreign ownership as applied in the banking sector
influences strategic decision making. This is possible through the entry of foreign banks in an
economy bringing in efficiency, better capitalization and technical capacity which can also
spread to other banking institutions [70]. On the contrary, in case of a financial crisis, foreign
ownership through entry of foreign banks in an emerging economy may transfer or trigger a
financial crisis that may affect performance of the entire banking sector [71]. Empirical evidence
shows that introduction of foreign ownership is beneficial to the firms. For example, authors
[13] found that banks with foreign ownership appeared to have better asset quality and overall
performance in China. In addition, banks with foreign ownership in Uganda and Botswana per-
formed better compared with their local counterparts [72]. Foreign ownership comes with more
experience and knowledge thereby supporting adoption of new corporate governance practices
[73]. Foreign ownership act as a salient monitoring tool required to protect firm’s profits and
shareholders’ wealth [74]. In contrast [75], argued that some foreign owners may behave pas-
sively in contrary to their monitoring roles for various reasons allowing managers to misrepre-
sent information for their own interests, especially where foreign owners are directly affected by
investment duration. In line with these findings, this study hypothesized that;
H01: Foreign ownership has no relationship with financial performance of commercial banks
in Kenya.

3. Methodology
3.1 Sample selection
The study focused on Kenyan commercial banks. Data was obtained from annual financial
reports and statements from 2009 to 2020. Financial reports and statements provided data
which was relevant in relation to the variables in this study. The study used data from 39 com-
mercial banks out of the 42 commercial banks. Three banks were dropped for lack of data for
the entire period of study.
3.2 Model and measurement of the variables

To meet the purpose of this study, four models were developed to test the relationship between
ownership structures and the various financial performance measures employed in the study.
The models developed were;
NIMit ¼ b0 þ b1 SOit þ b2 MOit þ b3 IOit þ b4 FOit þ b5 BSit þ b6 CRit þ eit ð1Þ
EPSit ¼ b0 þ b1 SOit þ b2 MOit þ b3 IOit þ b4 FOit þ b5 BSit þ b6 CRit þ eit ð2Þ
ROAit ¼ b0 þ b1 SOit þ b2 MOit þ b3 IOit þ b4 FOit þ b5 BSit þ b6 CRit þ eit ð3Þ
ROEit ¼ b0 þ b1 SOit þ b2 MOit þ b3 IOit þ b4 FOit þ b5 BSit þ b6 CRit þ eit ð4Þ
Where NIMit, EPSit, ROAit, ROEit represent bank ‘s performance at a given time (t), SO,
MO, IO, and FO are abbreviations for state ownership, managerial ownership, institutional
ownership and foreign ownership respectively, BS and CR are abbreviations for control vari-
able bank size and credit risk respectively.
Based on the previous studies, the dependent, independent and control variables were mea-
sured as follows;
3.2.1 Dependent variable: Financial performance. This study used four financial perfor-
mance measures, that is, net interest margin (NIM) earnings per share (EPS), return on assets
(ROA) and return on equity (ROE). ROA and ROE are traditional measures that have been
used in many empirical studies [76, 77]. NIM has been used as a measure of financial perfor-
mance in financial firms [78–80]. In addition, study by [81, 82] confirm EPS as an appropriate
measure of firm’s financial performance as it summarizes the firm’s earning ability.
3.2.2 Independent variables: Ownership structure and control variables. The study
considered four categories of ownership structure in line with existing literature; state owner-
ship which represents a proportion of firm’s stake held by the state, managerial ownership
which represents the percentage of equity of shares held by top managers of a firm [36], insti-
tutional ownership which represents a proportion of equity shares held by institutional inves-
tors [23] and finally, foreign ownership which represents a percentage of shares held by
foreign entities or individuals [73].
The study further adopted bank size and credit risk as control variables. The size of the firm
indicates the muscle stretch of a firm to fund and organize its operations [83]. In this study,
total bank assets were used as a measure of bank size. The second control variable was credit
risk, which is a ratio of non-performing loans (NPLs) to total loans and advances. NPLs affect
banks’ financial performance negatively by denying banks interest income. Table 1 shows a
summary of the variables that were used in the model.

Table 1. Operationalization and measurement of variables.

Variable Abbreviation Measurement
Independent variables:
Ownership Structures:
(i) State ownership SO (i) Percentage of bank’s equity shares held by state
(ii) Managerial MO (ii) Percentage of bank’s equity shares held by managers
ownership
(iii) Institutional IO (iii) Percentage of bank’s equity shares held by institutions
ownership
(iv) Foreign ownership FO (iv) Percentage of bank’s equity shares held by foreign individuals and
institutions
Control variable:
(i) Bank size BS (i) Natural log of Total assets
(ii) Credit risk CR (ii) NPLs/Total loan and advances
Dependent variables:
(i) Net Interest Margin NIM (i) Net interest income to total assets
(ii) Earnings per Share EPS (ii) Net income to shares outstanding
(iii) Return on Assets ROA (iii) Net income to total assets
(iv) Return on Equity ROE (iv) Net income to total equity
https://doi.org/10.1371/journal.pone.0268301.t001
4. Empirical results and discussion

4.1 Descriptive statistics
Descriptive statistics for the study variables are shown in Table 2. The net interest margin was
0.064. This demonstrated that banks’ performance in terms of NIM was relatively low deviat-
ing with 0.219. In addition, NIM varied from a minimum of -0.021 to a maximum of 4.715.
This low performance implied that the entire commercial banking sector performance could
be rated low during the period under study. The mean EPS was 35.564 with a minim of
-186.35 and a maximum of 727.22. These statistics indicate a wide variation in EPS with a stan-
dard deviation of 100.07 in the Kenyan context. This an indication that there was a significant
difference within commercial banks in Kenya in terms of dividend payments. The mean value
of ROA was 0.017 with a minimum of -0.247 and a maximum of 1.416. These statistics indicate
a relatively low performance with a standard deviation of 0.073. These results of low perfor-
mance in ROA led to the conclusion that there was underperformance of banks’ assets in gen-
erating revenue. The mean of ROE was 0.377. This statistic implies that banks’ performance in
Table 2. Descriptive statistics.

Variable Mean Std. Dev. Min Max
SO 0.57 0.198 0 0.908
MO 0.141 0.250 0 1
IO 0.585 0.348 0 1
FO 0.345 0.409 0 1
BS 7.567 0.697 5.143 9.481
CR 0.145 0.279 0 4.523
NIM 0.064 0.219 -0.021 4.715
EPS 35.564 100.07 -186.35 727.22
ROA 0.017 0.073 -0.247 1.416
ROE 0.377 5.400 -0.948 115.423

ROE was moderate though the variation was huge reporting a minimum of -0.948 and a maxi-
mum of 115.423.
The results in Table 2 show that there was some diversity in terms of banks’ ownership
structure. The mean state ownership was 0.57 while that of managerial ownership was 0.141.
These statistics demonstrate a considerably low managerial ownership in Kenyan banks as
compared to state ownership. The mean institutional ownership was 0.585. This demonstrated
a considerable institutional ownership in a number of commercial banks in Kenya. As a result,
we conclude that this ownership structure was beneficial in many commercial banks in Kenya
through offering checks on managerial decisions. The mean of foreign ownership was 0.345
with a standard deviation of 0.409. This showed existence of a considerable foreign ownership
in Kenyan commercial banks which could be beneficial through introduction of new manage-
rial skills.
The mean of bank size was 7.567 ranging from a minimum of 5.143 to a maximum of
9.481. The standard deviation of bank size was 0.697. These results show that commercial
banks’ assets in Kenya varied within the period under study. The mean credit risk was 0.145
ranging from 0 to 4.523. This demonstrated a high degree of credit risk in commercial banks
in Kenya with a standard deviation of 0.279. This implied that commercial banks in Kenya
faced a challenge of non-performing loans which denied them net interest income.
4.2 Diagnostic tests

Prior to data analysis, it was vital to ensure that all the assumptions of regression models were
met. Among the tests conducted were stationarity test, normality, heteroskedasticity, auto cor-
relation and multicollinearity. Diagnostic tests results are shown in Table 3.
Results of Philips-Perron test in Table 3(a) indicated absence of unit root which implied
that the data was stationary. The Doornik-Hansen test statistic for the multivariate normality
in Table 3(b) indicated a significant Chi2 statistic of 1.72e+05, which implied that data for the
variables employed in the models was normally distributed. Table 3(c) shows that VIF values
were less than 10 indicating absence of multicollinearity. In addition, Breuch-Pagan test in
Table 3(d) show that data was homoskedastic (p-values > 0.05) and therefore appropriate for
further analysis.
4.3 Ownership structures and net interest margin

The study sought to establish the relationship between ownership structures and net interest
margin. Net interest margin was one of the financial performance measures used as a depen-
dent variable. The results are presented in Table 4.
The results in Table 4 indicate a statistically significant Ch2 statistic (545.08). This implied
that the model was good for estimating NIM. The R-squared was 0.5304, implying that 53.04%
of the variations in commercial banks’ NIM were accounted for by the changes in ownership
structure. Both institutional ownership and foreign ownership had statistically insignificant
coefficients at 5% level of significance. This implied that institutional ownership and foreign
ownership had an insignificant effect on NIM. In addition, Table 4 shows statistically signifi-
cant coefficients of state ownership (-0.141) and managerial ownership (-0.093) respectively.
These statistics indicated that state ownership and managerial ownership had a negative signif-
icant effect on commercial banks’ NIM in Kenyan commercial banks. The results imply that a
percentage increase in state ownership would lead to a decrease in banks’ NIM by 14.1%. This
finding confirms previous work by author in [38–40], who found that state owned banks
exhibit lower financial performance associated with weaker corporate governance and high
risk levels. In addition, the finding supported the works of [41, 42] who established a negative

Table 3. Diagnostic tests.

(a) Stationarity statistics
Variable z statistic P-Value
NIM -1.48 0.0231
EPS -5.17 0.000
ROA -1.73 0.0420
ROE -2.77 0.0027
CR 2.18 0.0342
BS -0.62 0.0262
FO 0.7391 0.0171
IO 1.8013 0.0451
MO 3.5782 0.0399
SO 1.1374 0.0423
(b) Doornik-hansen test statistic
Chi2 Statistic P-Value
1.72e+05 0.000
(c) Multicollinearity
VIF
Fitted values of NIM 1.30
Fitted values of EPS 1.32
Fitted values of ROA 1.30
Fitted values of ROE 1.30
(d) Breuch-pagan satistics
Ownership Structure Variables
Test statistic P Value
Variables: fitted values of NIM 354.6 0.245
Variables: fitted values of EPS 532.9 0.167
Variables: fitted values of ROA 257.8 0.423
Variables: fitted values of ROE 438.7 0.156
relationship between state ownership and banks’ financial performance. The findings of this
study also support the work of [37] who found that ownership of commercial banks was inef-
fective due to weak monitoring efforts of government, political interference and weaker mana-
gerial incentives compared to privately owned banks especially in the Kenyan context. The
Table 4. Ownership structure and net interest margin.

Coef Std. Err. Z P_value
� �
SO -0.141 0.051 -2.74 0.006
MO -0.093� 0.048 -1.96� 0.050
IO -0.048 0.034 -1.39 0.165
FO 0.006 0.023 0.26 0.791
BS -0.034� 0.013 -2.53� 0.011
CR 0.580� 0.026 22.67� 0.000
cons 0.285� 0.105 2.7� 0.007
R-squared 0.5304
Chi2 545.08� 0.000
Dependent variable: NIM,

�
indicates statistical significance at 5%

study finding contradicts the work of [43, 44] who found a positive relationship between state
ownership and performance. Therefore, as suggested by [42], ownership structure reorganiza-
tion through partial privatization need to be undertaken in those commercial banks with high
level of government presence as a tool to improve performance.
Table 4 results indicate that a percentage increase in managerial ownership would lead to a
decrease in banks’ NIM by 9.3%. The finding of this study supports the work of [55] in United
States who established a significant and negative relationship between managerial ownership
and commercial banks financial performance. In addition, the results confirm the work of [56]
in Australia who observed a negative relation between insider ownership and performance.
This study therefore agrees with the earlier finding that management ownership decreases
firms’ performance associated with more voting powers by management controlling strategic
decisions making tailored to their own personal gain [47].
The finding contradicts the work of [51] who found that management ownership is a struc-
ture that supports both the interest of shareholders and managers to enhance performance of a
firm. This finding also contradicts the work of authors in [2, 32, 36, 48, 49, 50, 51] who found a
positive relationship between managerial ownership and banks’ performance.
4.4 Ownership structures and earnings per share

The study also sought to establish the relationship between ownership structures and earnings
per share (EPS). The results are presented in Table 5.
Table 5 indicates a statistically significant Ch2 statistic (20.72). This statistic implied that the
model used to estimate EPS was good. The R-squared statistic was 0.0213. This indicated that
2.13% variations in commercial banks’ EPS was as result of changes in banks’ ownership struc-
ture. Table 5 results show statistically insignificant coefficients of state ownership (-92.26) and
institutional ownership (-31.76). This implied that both state ownership and institutional own-
ership have insignificant effect on commercial banks’ EPS. However, Table 5 shows a statisti-
cally significant coefficients of managerial ownership (-144.04) and foreign ownership
(-72.62). These statistics implied that managerial ownership and foreign ownership had nega-
tive significant effect on banks’ EPS. The results imply that a percentage increase in managerial
ownership in Kenyan commercial banks would lead to a decrease in EPS by KES. 144.04. The
study finding supports the earlier work of [47, 54] who observed that management ownership
negatively relates to firms’ performance. In addition, the study findings agree with the recent
work by authors in [56, 57] who observed that insider ownership increases the controlling
Table 5. Ownership structures and earnings per share.

Coef Std. Err. Z P_value
SO -92.26 75.71 -1.22 0.223
MO -144.04� 51.59 -2.79� 0.005
IO -31.76 44.79 -0.71 0.478
FO -72.62� 24.82 -2.93� 0.003
BS 25.31� 10.68 2.37� 0.018
CR 12.28 11.04 1.11 0.266
cons -86.41 80.18 -1.08 0.281
R-squared 0.0213
Chi2 20.71� 0.002
Dependent variable: EPS,

�

powers of executives acting on their own interests. This executive act erodes shareholders’
wealth in the long run. However, the finding contradicts the work of [2, 32, 36] who observed
a positive relation between managerial ownership and banks’ performance.
Results in Table 5 indicated that a percentage increase in foreign ownership in Kenyan
commercial banks would lead to a decrease in EPS by KES 72.62. This study confirms the
work of [75] who found that where foreign ownership does not play its monitoring roles effec-
tively and prefer payment of dividends to improve corporate image of the firm, managers may
represent information for their own interests. This leads to a decline in the firm’s performance.
The finding contradicts the work of [13] in China and [72] in Uganda and Botswana. These
studies found that banks with foreign ownership performed better compared to those with
absence of foreign ownership.
4.5 Ownership structures and return on assets

The study further sought to establish the relationship between ownership structure and return
on assets. The model results are presented in Table 6. The Ch2 statistic (333.54) was significant
indicating that the model was fit for estimation of ROA. The R-squared statistic was 0.3137.
This implied that 31.37% variations in commercial banks’ ROA were accounted for by the
changes in banks’ ownership structure.
Table 6 indicates statistically insignificant coefficients of state ownership (-0.0521), manage-
rial ownership (-0.0297) and foreign ownership (-0.0005). These statistics implied that state
ownership, management ownership and foreign ownership had an insignificant effect on com-
mercial banks’ ROA. However, the institutional ownership coefficient (-0.0399) was statisti-
cally significant. This statistic indicated that institutional ownership had a negative significant
effect on commercial banks’ ROA. A one percentage increase in institutional ownership would
lead to a decrease in ROA by 3.99%. The study finding supports the work of authors in [68, 69]
who established a negative association between institutional ownership and financial perfor-
mance. This finding contradicted the work of [51, 63, 65–67] who found a positive relationship
between institutional ownership and firms’ financial performance. In addition, the finding of
this study contradicted the work of [3, 59] who observed that high firm’s financial performance
is deemed to be associated with institutional ownership which provides high quality manage-
ment and improved corporate governance in the firms. This study associate’s institutional
ownership with low firm’s performance. An increase in institutional ownership in commercial
Table 6. Ownership structures and return on assets.

Coef Std. Err. z P-value
SO -0.0521 0.028 -1.87 0.062
MO -0.0297 0.024 -1.21 0.225
IO -0.0399� 0.018 -2.19� 0.029
FO -0.0005 0.012 -0.04 0.968
BS -0.0092 0.006 -1.50 0.134
CR 0.1669� 0.009 17.87� 0.000
cons 0.0931� 0.048 1.94� 0.052
R-squared 0.3137
Chi2 333.54� 0.000
Dependent variable: ROA,

�

Table 7. Ownership structure and return on equity.

Coef. Std. Err. z P_value
SO -0.039 1.373 -0.03 0.977
MO 3.861� 1.305 2.96� 0.003
IO 0.539 0.924 0.58 0.560
FO -0.523 0.634 -0.82 0.409
BS 0.016 0.392 0.04 0.967
CR 1.276 0.915 1.39 0.163
cons -0.607 3.087 -0.20 0.844
R-squared 0.0332
Chi2 15.44� 0.0171
Dependent variable: ROE,

�
banks especially where large institutional shareholders tend to make decisions for their own
interests at the expense of minority stockholders results to a decline in financial performance.
4.6 Ownership structures and return on equity

Finally, the study sought to establish the relationship between ownership structures and return
on equity. Results in Table 7 indicate a significant Ch2 statistic (15.44) which implied that the
model was good for estimation. Further, the R-squared statistic was 0.0332. This implied that
3.32% variations in ROE was as a result of changes in commercial banks ownership structure.
Table 7 indicates statistically insignificant coefficients of state ownership (-0.039), institu-
tional ownership (0.539) and foreign ownership (-0.523). These statistics demonstrated that
state ownership, institutional ownership and foreign ownership had an insignificant effect on
commercial banks’ ROE. The coefficient of management ownership (3.861) was statistically
significant. A one percentage increase in management ownership would lead to an increase in
commercial banks’ ROE by 306.1%. This study finding supports the work of authors in [32, 36,
49] who observed a positive relation between management ownership and firms’ performance.
This study confirms the findings of [51] that management ownership is a tool for ownership
structure that supports both the interest of shareholders and managers to enhance perfor-
mance of a firm through an improved corporate governance practices. However, this finding
contradicted the work of [55] in United States and other authors in [47, 52, 54, 56] who
observed a negative relation between insider ownership and banks’ performance.
4.7 Robustness check

To ensure reliability of the models’ results, Hausman test was used to arrive at the appropriate
models for data analysis. The study therefore made a choice between the fixed effects and ran-
dom effect models. The null hypothesis under Hausman test was that the preferred model was
random effect. Where the p-value was less than 0.05, the preferred model was random effects.
The Hausman test results presented in Table 8 indicate a significant Chi2 statistics for the
dependent variables. This implied that the preferred model was random effect for each of the
four dependent variables employed in the study. Robustness of results was also checked using
maximum likelihood (ML) model. The ML results in Table 9 showed that the results were
robust. Most of the variables retained their coefficient signs and statistical significance.

Table 8. Hausman test results.

Dependent variable Chi2 p-value Preferred model
NIM 55.93 0.000 Random effects
EPS 14.94 0.021 Random effects
ROA 81.12 0.000 Random effects
ROE 25.04 0.003 Random effects
Table 9. Random-effects ML regression results.

NIM EPS ROA ROE
SO -0.145(-2.53)� -92.28(-1.23) -0.057(-1.53) -0.039(-0.03)
MO -0.096(-1.83) -144.36(-2.64)� -0.024(-0.80) 3.862(2.98)�
�
IO -0.056(-1.40) -31.81(-0.71) -0.061(-2.22) 0.539(0.59)
FO 0.005(0.19) -72.71(-2.88)� 0.001(0.04) -0.523(-0.83)
BS -0.042(-2.35)� 25.33(2.37)� -0.018(-2.21)� 0.016(0.04)
� �
CR 0.584(22.67) 12.28(1.12) 0.171(18.37) 1.276(1.41)
Chi2 358.67� 19.94� 248.4� 15.29�
5. Summary and conclusions

This study examined the relationship between ownership structures (state ownership, manage-
rial ownership, institutional ownership and foreign ownership) and financial performance
(net interest margin, earnings per share, return on assets and return on equity) for a sample of
39 commercial banks in Kenya, for the period 2009 to 2020. The findings indicated a strong
evidence of ownership structures explaining the differences in commercial banks’ financial
performance in Kenya. The results established that the greatest influence of ownership struc-
tures was on NIM (53.04%), followed by ROA (31.37%). The influence of ownership structures
was low on ROE (3.32%) and EPS (2.13%).
The results found a significant and negative relationship between state ownership and
NIM. However, state ownership was found to have an insignificant effect on both EPS, ROA
and ROE. The expectation was that state ownership would improve governance practices for
improved performance. The study concludes that state ownership of commercial banks is inef-
fective due to weak monitoring efforts of governments resulting, weaker managerial incentives
and political interference that interfere with corporate governance practices. As a result, own-
ership structure reorganization through partial privatization is essential in those commercial
banks with high level of government presence as a tool for improving bank financial
performance.
The findings showed a significant and negative relationship between management owner-
ship and both NIM and EPS. The findings also established a significant and positive relation-
ship between management ownership and ROE. The expectation of this study was that
management ownership would positively relate with banks’ financial performance. However,
in the contrary, evidence established a negative relationship between NIM and EPS.
The study results established insignificant effect of institutional ownership on NIM, EPS
and ROE. However, the results found evidence that institutional ownership has a significant
and negative effect on ROA. This study associates poor financial performance in commercial
banks especially in Kenya with high level of institutional ownership. Large institutional share-
holders tend to make decisions for their own interests at the expense of minority and individ-
ual stockholders resulting to a decline in financial performance.

Lastly, this study established an insignificant relationship between foreign ownership and
NIM, ROA and ROE, but a significant and negative relationship between foreign ownership
and EPS. The expectation was that the presence of foreign ownership would result to an
increase in financial performance. The finding of this study was contrary as foreign ownership
had no effect on NIM, ROA and ROE. In addition, presence of foreign ownership resulted to a
decline in EPS. This was attributed to low levels of monitoring by foreign investors.
5.1 Recommendations
Based on the above conclusions, the findings of this study have the following practical implica-
tions. First, the results show that ownership structures influence financial performance of
commercial banks in Kenya. The most affected financial performance was NIM and ROA.
Thus, the finding of this study suggests that regulators of commercial banks should require all
commercial banks to vary their ownership structures optimally to boost financial performance
of commercial banks. Secondly, study found a significant negative association between state
ownership and NIM. On the other side, an insignificant effect of state ownership was observed
on EPS, ROA and ROE. The study concluded that there was ineffectiveness of state ownership
due to weak monitoring efforts of governments. This study recommends that banks with high
percentage of state ownership should consider full or partial privatization to improve corpo-
rate governance practices which is essential for improving banks’ performance. Third, the
study found a significant negative association between management ownership and both NIM
and EPS and a positive association between management ownership and ROE. The study con-
cluded that the existence of negative association was possibly because bank managers control
high level of equity gaining more powers to influence strategic decisions that benefit them
instead of aiming at improving performance positively. Policy makers should adopt manage-
rial ownership policy limiting the proportion of equity bank managers should hold. This
would limit their powers and put them under monitoring by other equity holders.
Fourth, the study also found that institutional ownership had a significant negative relation-
ship with ROA. The negative relationship could be attributed to the large proportion of institu-
tional shareholding. As a result, high institutional shareholding especially by few institutional
investors tends to make decisions for their own gain at the expense of improving corporate
governance. Since institutional ownership had no influence on other financial performance
measures, bank executives should ensure optimal proportion of institutional ownership to
avert its negative effect on ROA. The study also suggests that a percentage limit of equity stock
an institutional investor should hold be put in place. Lastly, the study expected that foreign
ownership would influence banks’ performance positively. However, evidence from this study
found an insignificant effect between foreign ownership and NIM, ROA and ROE and a signif-
icant negative relationship between foreign ownership and EPS. The study concluded that this
finding was as a result of low level of monitoring by foreign investors on banks’ operations.
The study therefore suggests that bank regulators should come up with a policy detailing the
role and place of foreign investors in strategic decision making. This will ensure that their pres-
ence is felt in every decision undertaken by bank managers.
5.2 Suggestion for further study

This study had some limitations. First, the study considered only one aspect of corporate gov-
ernance (ownership structure) in commercial banks. The study therefore suggests a further
study where other corporate governance aspects such as board size, board independence,
board skills are all included. Secondly, the study focused on the Kenyan commercial banking
sector. A similar study could be carried out covering a wider region especially the East African

Community and the Inter-governmental Authority on Development Region. Despite these

limitations, the findings of this study contributes to both practice and existing literature on
ownership structure.
Supporting information
S1 File.
(PDF)
Author Contributions
Conceptualization: Peter Njagi Kirimi.
Data curation: Peter Njagi Kirimi.
Formal analysis: Peter Njagi Kirimi.
Methodology: Peter Njagi Kirimi, Samuel Nduati Kariuki, Kennedy Nyabuto Ocharo.
Supervision: Samuel Nduati Kariuki.
Validation: Samuel Nduati Kariuki, Kennedy Nyabuto Ocharo.
Writing – original draft: Peter Njagi Kirimi.
Writing – review & editing: Samuel Nduati Kariuki, Kennedy Nyabuto Ocharo.
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Ownership Structure and Financial Performance: Evidence From Kenyan Commercial Banks

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Ownership Structure and Financial Performance: Evidence From Kenyan Commercial Banks

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Ownership structure and financial

a1111111111 ☯ These authors contributed equally to this work.

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2. Theoretical literature review

2.2 Empirical literature and hypothesis development

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structure on financial performance of commercial banks and focused on four dimensions of

2.2.2 Managerial ownership. Managerial ownership is the proportion of shares that is

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respectively. Further [57], established a significant negative effect of managerial ownership on

2.2.3 Institutional ownership. Institutional ownership is another tool used to mitigate

2.2.4 Foreign ownership. Foreign ownership is another ownership structure known to

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3.2 Model and measurement of the variables

EPSit ¼ b0 þ b1 SOit þ b2 MOit þ b3 IOit þ b4 FOit þ b5 BSit þ b6 CRit þ eit ð2Þ

ROAit ¼ b0 þ b1 SOit þ b2 MOit þ b3 IOit þ b4 FOit þ b5 BSit þ b6 CRit þ eit ð3Þ

ROEit ¼ b0 þ b1 SOit þ b2 MOit þ b3 IOit þ b4 FOit þ b5 BSit þ b6 CRit þ eit ð4Þ

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Table 1. Operationalization and measurement of variables.

4. Empirical results and discussion

Table 2. Descriptive statistics.

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4.2 Diagnostic tests

4.3 Ownership structures and net interest margin

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Table 3. Diagnostic tests.

Table 4. Ownership structure and net interest margin.

Dependent variable: NIM,

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4.4 Ownership structures and earnings per share

Table 5. Ownership structures and earnings per share.

Dependent variable: EPS,

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4.5 Ownership structures and return on assets

Table 6. Ownership structures and return on assets.

Dependent variable: ROA,

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Table 7. Ownership structure and return on equity.

Dependent variable: ROE,

4.6 Ownership structures and return on equity

4.7 Robustness check

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Table 8. Hausman test results.

Table 9. Random-effects ML regression results.

5. Summary and conclusions

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5.2 Suggestion for further study

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Community and the Inter-governmental Authority on Development Region. Despite these

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