The Effect of Selected Macro Economic Variables on Financial Performance of Commercial Banks Listed at the Nairobi Securities Exchange

Abstract

Commercial banks around the world play a vital role in economic performance as well as the performance of various sectors of the economy. These institutions acts as the intermediaries linking most sectors of the economies in providing various financial services. However, economic factors tend to affect financial institutions in various ways as the performance of financial institutions is vital to the performance of GDP. The economic variables have impact on the default rate and profits of banking institutions. The study aimed at assessing the effect of selected macroeconomic factors on performance of commercial banks listed at the NSE. To achieve this objective, the study explored the theories guiding the study including: the Balassa- Samuelsson model (B-S) and the international Fischer effect which all explain how macroeconomic factors affect commercial banks listed at the NSE. It adopted a descriptive research design from secondary data, which was covering 6 years from 2011-2016. Data analysis was through descriptive statistics which comprised of the arithmetic mean, variance and standard deviation. Correlation and pooled regression analysis made up the inferential statistics and used in establishing existing correlation linking the research variables. The results revealed a strong Positive association between the exchange rates fluctuations and the returns of banks during the study period. The results also show a weak negative relation to changes in inflation rates. The results further indicate a strong negative correlation linking CBR to profitability of commercial banks. However, the co-relation between commercial bank MVA and GDP was also a very strong negative one. The study concluded that performance of commercial banks listed at NSE is significantly influenced by inflation, central bank rate, exchange rate and GDP. The study recommends that CBK should adequately put measures to safeguard the value of the domestic currency and the government should aim at raising the national income through encouraging local investments in the country.