LEADERSHIP STYLE, FINANCIAL INNOVATION, BANKING REGULATION AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

Abstract

Leadership style has been considered a critical factor influencing financial performance of firms across the globe. Commercial banks in Kenya have registered mixed financial performance results over the past ten years despite the homogeneity of the industry market conditions. Disparity in financial performance prompted the need to assess if leadership style could be responsible. Relationship between leadership style and financial performance have been studied with mixed findings indicating a possibility of other factor-variable roles in mediating or moderation. Financial innovation being considered a leader’s decision, and banking regulations as factor outside leader’s decision ambit, could possibly define this relationship. However little or no empirical evidence have been documented to explain these phenomena prompting the need for this study. The study was guided by the specific objectives namely to establish the influence of leadership style on the financial performance of commercial banks operating in Kenya; examine the intervening effect of financial innovation on the relationship between leadership style and the financial performance of commercial banks operating in Kenya; determine the moderating effect of banking regulation on the relationship between leadership style and financial performance of commercial banks in Kenya; and determine the moderating effect of banking regulation on the mediating role of financial innovation on the relationship between leadership style and financial performance of commercial banks in Kenya. The study was anchored on Behavioral Leadership Theory, Diffusion of Innovation Theory, Agency Theory and Stakeholder Theory. The study adopted a positivist philosophy; correlational and cross-sectional research deigns and a target population comprising management staff working in commercial banks. 385 respondents were selected from 10,395 management staff. Primary data was collected using structured questionnaires with data being analyzed using both descriptive and inferential statistics. Descriptive statistics such as frequency, percentages, means and standard deviations were adopted while correlation analysis was used to establish the strength and direction of relationship between the variables. Regression PROCESS conditional analysis was used to establish the meditation, moderation and moderated-mediated analysis. Parametric test statistics was adopted to establish the significance influence of variable effect at 95% level of significance as well as to test the study hypothesis. The findings indicated that there exists a partial mediation effect on the mediating role of financial innovation on the relationship between leadership style and financial performance. Further, there is a significant negative moderating effect of banking regulation on the relationship between leadership style and financial performance of commercial banks in Kenya. Lastly, the study findings indicated that there exists negative and significant moderating effect of banking regulation on the mediating role of financial innovation in mediating the relationship between leadership style and financial performance of commercial banks in Kenya. The study recommended that that top managers of the commercial banks need to take up effective transformational and democratic leadership style in their management programs. The leaders within banks should emphasize research and development and ensure that the working environment is suitable for creativity and innovation. Lastly, the study recommends that bank managers and owners abide by the banking regulations according to the CBK guidelines. Limitations wise, some banks considered information on banking innovation and impacts of regulation to be confidential and were therefore reluctant to respond to the questionnaire. Some bank managers also indicated that it was against their company policy to divulge any information on the company operations. The researcher took time to convince the respondents by informing them that the data was purely for research purposes. In some cases, alternative respondents were identified using the multi-level sampling method.