STRENGTHENING FINANCIAL STABILITY THROUGH INTERNAL CONTROLS: EVIDENCE FROM COMMERCIAL BANKS LISTED AT THE NAIROBI SECURITIES EXCHANGE
Abstract
Purpose of Study: This study therefore sought to examine the effect of internal controls on the financial stability of commercial banks listed at the Nairobi Securities Exchange. Financial stability was assessed using capital adequacy and liquidity.
Problem Statement: Commercial banks listed at the Nairobi Securities Exchange continue to experience episodes of financial instability despite operating under comprehensive corporate governance regulations and supervisory frameworks. This persistent instability raises concerns about whether conventional governance mechanisms adequately address the ownership structures, strategic relationships, and internal controls that shape the behaviour and resilience of banks in emerging markets.
Methodology: Guided by a pragmatist philosophical stance, the study adopted a mixed-methods approach with an explanatory design as the primary structure, complemented by descriptive elements for contextual understanding. The unit of analysis comprised the eleven commercial banks listed on the Nairobi Securities Exchange. Secondary quantitative data was extracted from annual reports, audited financial statements, and regulatory publications.
Result: The findings revealed that internal controls have a significant positive effect on capital adequacy (β = 0.0273, p = 0.004), indicating that stronger internal controls improve long-term financial stability. However, their effect on liquidity was statistically insignificant (β = 0.0084, p = 0.212) suggesting limited influence on short-term financial positions.
Conclusion: Internal controls primarily support long-term stability rather than immediate liquidity.
Recommendation: Listed commercial banks should support internal control systems as a foundation for long-term financial stability by investing in advanced risk management systems and internal audit technologies that improve the accuracy and timeliness of financial reporting.
Keywords: Internal controls, Financial Stability, Commercial Banks, Nairobi Securities Exchange, Capital Adequacy
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