Factors Affecting Financial Performance of Commercial Banks in Kenya
DOI:
https://doi.org/10.53819/81018102t2122Abstract
Commercial banks are crucial in determining a nation's economic growth and stability. The study objective was to determine the variables that affect Kenya's commercial banks financial performance. ROA measurement of financial performance served as the dependent variable. The independent factors included bank size, managerial effectiveness, asset quality, liquidity, and capital adequacy. To explain the relationship between the dependent and independent variables, the study employed a descriptive research approach. The analysis was done using a multiple linear regression model with secondary data obtained from banks audited yearly financial statements. The findings revealed that the predictor variables accounted for 40.6% of changes in financial performance while 59.4% changes in financial performance could be explained by other internal factors not considered in this study. Additionally, it was established that AQ and SZ had a favorable impact on ROA, supporting the idea that a rise in AQ and SZ causes an increase in ROA. On the other hand, CA, LR and ME had negative effect on ROA leading to the conclusion an increase in CA, LR and ME leads to a decrease in ROA. The study recommended that the CBK adopt flexible policy to match the prevailing economic and market conditions in determining the minimum capital adequacy and liquidity ratios to caution banks from holding excessive capital and assets. A study on the impact of CAMEL indicators on financial performance including all commercial banks in Kenya was recommended because the study left out earning capacity as an internal factor.
Keywords: Financial Performance, Capital Adequacy, Asset Quality, Management Efficiency, Size & Liquidity
References
Alhassan, A. L., Tetteh, M. L., & Brobbey, F. O. (2016). Market power, efficiency and bank profitability: evidence from Ghana. Economic Change and Restructuring, 49(1), 71-93.
Ali, M., & Puah, P. C. (2018). The internal determinants of bank profitability and stability. An insight from banking sector of Pakistan. Management Research Review and deposit behaviors of conventional and Islamic banks. Pacific- Basin Finance Journal, 58 75.
Arif, A., & Anees, A. N. (2012). Liquidity risk and performance of banking system. Journal of Financial Regulation and Compliance, 20(2), 182-195.
Athanasoglou, P., Brissimis, S., & Delis, M. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money, 18(2), 121--136
Bain JS (1951) Relation of profit-rate to industry concentration: American manufacturing, 1936–1940.Q J Econ 65:293–324
Baumol WJ (1982) Contestable markets: an uprising in the theory of industry structure. Am Econ Rev 72(1):1–15
Berger AN, Hannan TH (1998). The efficiency cost of market power in the banking industry: a test of the “quiet life’’ and related hypotheses. Rev Econ Stat 80:454–465
Caporale, G. M., Lodh, S., & Nandy, M. (2017). The performance of banks in the MENA region during the global financial crisis. Research in International Business and Finance, 42, 583-590.
CBK | Central Bank of Kenya. https://www.centralbank.go.ke/wp-content/uploads/2022/04/Directory-of-Licenced-Commercial-Banks-Mortgage-Finance-Institutions-NOHCs-Aprill-2022.pdf
Çekrezi, A., Shanini, E., Saadaoui, M., & Mekkaoui, S. (2015). Factors affecting performance of commercial banks in Albania. The European Proceedings of Social & Behavioral Sciences eISSN, 2357-1330.
Chowdhury, M. A., & Rasid, M. E. (2017). Determinants of Performance of Islamic Banks in GCC Countries: Dynamic GMM Approach. In Advances in Islamic Finance, Marketing, and Management, 49-80.
Cooper, D. R. & Schindler, P. S. (2014). Business research methods (12th ed.). New York: McGraw-Hill/Irwin.
Ghasempour, S., & Salami, M. (2016). Ranking Iranian Private Banks Based on the CAMELS Model Using the AHP Hybrid Approach and TOPSIS. International Journal of Academic Research in Accounting, Finance and Management Sciences, 52-62
Gutu, L. M. (2015). Micro Economic Factors Affecting Bank’s Financial Performance: The Case of Romania Sea- Practical Application of Science Volume III, 1 (7) / 20. https://kippra.or.ke/mergers-and-acquisitions-the-experience-in-kenyan-banking-industry/
Ifeacho, H. & Ngalawa, H. (2014). “Performance of the South African Banking Sector since 1994” Journal of Applies Business Research Volume 30 Number 4.
Kamande, E. G. (2017). The effect of bank specific factors on financial performance of commercial banks in Kenya (Doctoral dissertation).
Karim, M. A., Hassan, M., Hassan, T., & Mohamad, S. (2014). Capital adequacy and lending
King’oo, J. M. (2015). The effect of selected internal factors on the financial performance of commercial banks listed in the Nairobi securities exchange (Doctoral dissertation, University of Nairobi).
Menicucci, E., & Paolucci, G. (2016). The determinants of bank profitability: empirical evidence from European banking sector. Journal of Financial Reporting and Accounting, 14, 86-115
Mulualem, G. (2015). Analyzing Financial Performance of Commercial Banks in Ethiopia: CAMEL Approach (Doctoral dissertation, AAU)
Nguyen TN, Stewart C (2013) Concentration and efficiency in the Vietnamese banking system between 1999 and 2009: a structural model approach. J Financ Regul Compliance 21(3):268–283
Obamuyi, T. M. (2013). Determinants of Banks’ Profitability in a Developing Economy: Evidence from Nigeria. Organizations and Markets in Emerging Economies, 97-111.
Okoth, V and Gemechu, B (2013). Determinants of Financial Performance of Commercial Banks in Kenya. International Journal of Economics and Financial. Vol. 3(1)
Ongore, V., & Kusa, G. (2013). Determinants of financial performance of commercial banks in Kenya. International Journal of Economics and Financial Issues, 3(1), 237-252.
Sathyamoorthi, C., Mapharing, M., Ndzinge, S., Tobedza, G., & Wally-Dima, L. (2017, Oct 25). Performance Evaluation of Listed Commercial Banks in Botswana: The Camel Model. Archives of Business Research, 5, 142-159
Saunders, M., Lewis, P. & Thornhill, A. (2012). Research methods for business students (6th ed.). Harlow: Pearson.
Thisaranga, K. D. I. U., & Ariyasena, D. L. M. N. K. (2021). Effect of camel model on bank performance: with special reference to listed commercial banks in Sri Lanka.
Tiisekwa, F. (2013). Determinants of profitability of commercial banks using camel framework: a case of Tanzania (Doctoral dissertation, Mzumbe University).
Zagherd, M. K., & Barghi, M. (2017). Performance Evaluation of Iranian Banking Industry through CAMELS Framework. Journal of Accounting & Marketing, 6(2), 1-7
