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.