Effect of Corporate Social Responsibility Expenditure on the Financial Performance: Evidence from Commercial Banks in Kenya

Abstract

This study investigates the effect of corporate social responsibility (CSR) expenditure on the financial performance of commercial banks in Kenya guided by Legitimacy Theory. The study employed an explanatory research design and adopted census approach, covering all 39 licensed commercial banks as reported by the Central Bank of Kenya. The research relied exclusively on secondary data drawn from audited financial statements, annual reports and CSR disclosures. Data on CSR expenditure and financial performance indicators (return on equity and net profit) were systematically extracted using a document review checklist. Analysis was conducted using descriptive statistics, correlation analysis and regression modeling to determine the nature and strength of the relationship between CSR expenditure and financial performance. Descriptive analysis indicated that banks spent an average of KES 349.03 million on CSR, with wide variability across institutions (range: KES 33.95 million–688.68 million). Financial performance results showed an average return on equity (ROE) of 14.99% and net profit of KES 13.82 billion, reflecting moderate profitability but significant heterogeneity across banks. Larger Tier 1 banks demonstrated higher CSR expenditure, likely due to stronger fiscal capacity and reputational incentives, while smaller banks allocated fewer resources, often treating CSR as discretionary. Correlation analysis revealed that CSR expenditure had weak and non-significant associations with ROE (r = -0.16, p > 0.05) and net profit (r = -0.00, p > 0.05), suggesting that spending alone may not directly translate into improved financial outcomes. Regression analysis further showed that CSR expenditure had a positive effect on financial performance (β = 0.188, t = 2.000, p = 0.053), indicating that while CSR spending may contribute to profitability, the relationship was not statistically significant at the 5% level. The study recommends that commercial banks in Kenya align CSR expenditure with long-term business strategy to achieve both societal impact and financial performance. Policymakers, particularly the Central Bank of Kenya (CBK), should establish baseline CSR investment guidelines and mandate standardized reporting frameworks to enhance transparency, comparability, and accountability. In practice, banks are urged to adopt impact measurement tools such as cost-benefit and return-on-impact analyses, while strengthening stakeholder engagement to build trust and legitimacy. 

Keywords:       Corporate Social Responsibility (CSR), CSR expenditure, financial performance, commercial banks, Central Bank of Kenya (CBK).