The Effect of Using Customer Funding on Financial Performance of Commercial Banks in Kenya

Abstract

The study was on the effect customer funding on the financial performance of commercial banks in Kenya. The main issue was that there had been a gradual rise in customer deposits in Kenya. The profitability of the banking sector has also been on the rise over the recent past . The empirical problem therefore is whether there exists a relationship between the customer funding and banks profitability. The problem of the study and the research gap is based on the observation that there exists conflicting evidence of the effect customer funding on bank’s financial performance. There is evidence that shows a negative effect, while others show a positive effect while others show no effect at all. The study adopted a causal research design. The population of the study were all 44 commercial banks registered by the Central bank of Kenya as at 31 Dec 2016 . The study used secondary data (over a period of 10 years from 2009 to 2016) from the banking supervision department of Central bank. A cross sectional regression model was adapted. The regressions were conducted using statistical package for social sciences (SPSS) version 21. The Regression analysis findings revealed that customer funding has a negative significant effect on financial performance of commercial banks therefore the study recommends that since customer funding has a negative significant effect on financial performance of commercial banks there is a need for commercial banks to balance between the customer deposits they keep and the loans they give out. This is because more customer deposits than total loans become a liability in terms of interest paid to the deposit holders.