The Effect of social, cultural and economic capital on financial performance of Kenyan commercial banks
Wachira, Solomon Mwihungi
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The importance of banks in any economy cannot be underestimated as they act as the intermediaries between lenders and borrowers to ensure cash flows within the economy. It is therefore important for bank regulators worldwide to ensure that bank financial performance is positive so as to avoid bank runs that may cause systemic bank failures that may in turn lead to recessions or depressions. The Basel Accords were introduced in the early 1980s to ensure positive bank condition that would in turn translate to positive financial performance. However, even with the revision in 1991 and later in 1999 for Basel II, there have still been bank failures. The most recent widespread failures led to the global recession of 2008 which was occasioned by failures of banks that were classified as financially sound and whose financial performance was stable, for example, Lehmann Brothers in the United States of America. In response to the failure of “sound” banks, the Basel Committee revised their capital requirements in an attempt to ensure better risk regulation in banks. However, this measure only focused on financial capital while bank failures have been attributed to other factors other than the financial capital, for example, moral hazard by managers which leads to losses or poor governance which leads to huge non-performing loans. This observation from previous literature influenced this study through the introduction of social capital and cultural capital, which when combined with financial capital, form the Bourdieusian Theory. This theory explains that these three forms of capital influence organizations’ performance significantly and the relationship has been shown by previous studies. This study tested if social capital, cultural capital and financial capital have an effect on the financial performance of Kenyan commercial banks. This is done by using quantitative proxies identified by previous researchers and qualitative measures from the Integrated Reporting (IR) Framework, introduced by the International Integrated Reporting Council (IIRC). The quantitative proxies were used in the model to show the effect, if any, that social, cultural and financial capital had on financial performance. The framework introduced more dimensions of capital that influence companies namely; manufactured, intellectual, human, natural, and social and relationship in addition to the traditional financial capital. The paper established proxies to be used in the model for social, cultural and financial capital to compare to the financial performance. Qualitative measures were established to measure bank management’s perceptions on the importance of social and cultural capital. Data was collected from Kenyan banks that were in operation in 2016 and analyzed. The quantitative data collected showed that there existed a relationship between the three forms of capital, social, cultural and economic and the model used was significant. The perception of managers, measured using data collected using a questionnaire was also presented. It was found that most responses were moderate thus supporting the quantitative findings that social and cultural capital have an effect on bank performance and therefore regulators may consider incorporating them as measures affecting bank performance. The findings will build the pool of knowledge on Bourdieusian theory and its effect on the financial performance of banks in Kenya.