The Influence of Asset Quality on Financial Performance of Commercial Banks in Kenya

Abstract

The stability as well as resilience of a banking system can be used to determine the financial stability of a bank in any given economy. This can be done through banks maintaining quality bank assets which are capable of helping banking institutions achieve profitability. Despite the regulations of commercial banks in Kenya, many of them have collapsed and others placed under receivership due to frauds attributed to either weak or undermined control measures. This argument was based on fact established that the failure of banks is caused by the consequences of raising NPAs up in the entire banking system. This study therefore, focused on the examining the influence of asset quality on financial performance among commercial banks in Kenya. The study was anchored on the institutional theory and agency theory. This study relied on descriptive research design. The target population for this research comprised of all the 42 licensed commercial banks in Kenya which were in operation within the period of ten years that ranged from 2007 and 2016 from which secondary data was collected. Descriptive statistical techniques were used in data analysis. The Pearson‟s correlation revealed that only liquidity and capital adequacy had significant association towards financial performance of the commercial banks in Kenya while asset quality had an insignificant association. When regressed alone, it was revealed that asset quality was significantly related to financial performance of banks. However, upon inclusion of liquidity and capital adequacy as control variables in the relationship between asset quality and financial performance, it was found that liquidity and capital adequacy were the only variables that were found to be statistically significant on financial performance within commercial banks operating in Kenya. The study concluded that asset quality is significantly essential in measuring financial performance of financial institutions. The study recommended that the commercial banks operating in Kenya should put more emphasis on credit risk minimization and encourage diversity of revenue. Furthermore, the study also proposed that lending attitudes of commercial banks in Kenya should be regularly assessed by the CBK.