The Effect of Firm Specific Factors on Financial Performance of Commercial Banks in Kenya
Abstract
Performance of commercial banks is of importance to the investors since it impacts on
the return on investment, it is also a critical measure of economic strength of a
country that warrants a stable investment. Determining the specific factors that affect
firm performance has been a subject of empirical discussion. The objective of this
study was determining the effect of firm-specific factors on commercial banks’
financial performance in Kenya. To accomplish this goal, the study implemented a
descriptive research design to test the link between variables. The population for this
study included 43 commercial banks and thus a census was utilized and so sampling
was done. Published sources of data were obtained from CBK annual reports in a
duration spanning for 5 years (2012-2016). Analysis was done using SPSS; data was
processed using inferential and descriptive statistics. Mean standard deviation and
percentages were utilized to present data. The study found no correlation between
liquidity, ROI, capital adequacy, asset quality and size of bank with ROA. Analysis of
variance was significant. Capital adequacy, ROI and size of bank were positively
linked to commercial banks’ financial performance while loan quality and liquidity
exhibited a negative relationship with financial performance. Liquidity, size of bank
and ROI were significant while loan quality and capital adequacy were insignificant.
The study recommends that banks should invest largely on advanced technologies and
financial innovation to boost efficiency and mitigate operational costs. Management
of commercial banks should maintain a proper balance of debt and equity to protect
the bank from financial distress. Implementation of credit policies should be effected
to minimize non-performing loans. Banks should carry out research and development
to understand their customer needs so as to tailor their products and services in a
manner that can address the evolving customer needs. Because of time and resource
constraints, the study limited itself to commercial banks in Kenya thus the results
obtained in this study cannot be applied directly in another sector or to make
generalization of the entire banking sector in Kenya. This study considered only five
determinants (asset quality, ROI, liquidity, firm size and capital adequacy) however,
there are a myriad of factors that affect commercial banks’s performance that have not
been factor in. It would serve a great purpose if a comparative study could be
conducted involving firms from different sectors so as to compare findings after that a
plausible conclusion can be drawn. A replica of this study ought to be conducted but
this time round covering a longer duration of time, say ten years using a longitudinal
form of a research design in order to find out the cause and effect of the determinants
on commercial banks financial performance.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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