Green Financing, Corporate Social Responsibility, Reputation and Performance of Commercial Banks in Kenya

Abstract

Banking in Kenya is a critical part of the economic growth of the country as it helps in the circulation of money between the borrowers and the savers. Over the past few years, commercial banks have been embracing sustainability based financial approaches especially green financing in order to improve performance. This paper has tested the correlation between green financing (GF), corporate social responsibility (CSR), corporate reputation, and the firm performance (FP) of commercial banks in Kenya and CSR and corporate reputation as mediators between the green financing and performance relationship. The study was based on the stakeholder theory, resource-based view, legitimacy theory and signaling theory and used explanatory research design and census method where all 38 commercial banks that are present in Kenya were sampled in the study, both primary and secondary data being collected. Green financing was quantified by using the tools of green loans, green investments, carbon finance, climate finance, green mortgages, green infrastructure finance, and green insurance. CSR was also evaluated through environmental activities, community intervention, workforce welfare, and inclusion and diversity programs. Net promoter score, perceptions of the stakeholders, awards and recognitions, and sentiments expressed on social media were used to assess corporate reputation, whereas firm performance was represented by the measures of return on assets, customer satisfaction, employee satisfaction and adoption of digital/technology. The hypothesized relationships were tested using structural equation modeling (SEM), and diagnostic tests were used to verify the assumptions of linear regression. The results showed that green financing positively and significantly affects the financial performance of commercial banks. It was established that CSR positively influenced corporate reputation; both CSR and corporate reputation mediated the relationship between green financing and FP, individually and in a sequential manner. Particularly, CSR enhanced the positive impact of green financing through the generation of stakeholder trust and legitimacy, and corporate perception extended this impact, generating a sequential effect whereby green financing is converted into high performance. These findings support the hypothesized sequential mediating model, and it is important to note that the incorporation of sustainability initiatives and reputational management of strategic banking activities is vital. This research paper adds to theory by supporting and generalizing the Stakeholder Theory, the Resource-Based View, the theory of legitimacy and the theory of signalling to Kenyan commercial banks. In practice, it gives practitioners useful information that can be implemented by bank managers in order to develop integrated green financing and CSR strategies to improve the bank image and performance. Evidence is also availed to policy makers and regulators such as the Central Bank of Kenya, Kenya Bankers Association and National Treasury to guide them in coming up with favourable regulatory frameworks that facilitate sustainability within the banking sector. Taken together, the results highlight the fact that, in cases where it is planned and coordinated with CSR and reputational capital, green financing is not another point of compliance or philanthropic activity but a key to long-term financial and institutional prosperity.