Bank Restructuring, Financial Services, Firm Characteristics and Financial Performance of Commercial Banks in Kenya

Abstract

The main objective of the study was to investigate the relationship between bank restructuring, financial services, bank characteristics and financial performance of commercial banks in Kenya. The population of the study was the 44 commercial banks licensed and registered under the banking act to do business in Kenya. This study was able to gather information from the available financial statements of 39 commercial banks which were in operation for the period 2002 to 2014, therefore data for 5 commercial banks was not available. Descriptive and inferential data analysis methods were used to analyze the secondary data collected. The empirical findings conclude that commercial banks use all the four types of bank restructuring which included financial, capital, operational and asset restructuring. The findings of the first model revealed that capital restructuring and asset restructuring were the only variables found to have significant positive and negative influence respectively on the performance of commercial banks in Kenya. With the inclusion of moderating variables in the empirical model, it was discovered that only operational restructuring had a significant negative effect on the profitability of banks, while the influence caused by the interaction of capital restructuring and size was also significant but positive. In testing the third hypothesis, deposit and customer loans were used as intervening variables on the relationship between bank restructuring and financial performance, where financial restructuring and capital restructuring were found to significantly cause an increase in the profits of commercial banks while operational restructuring and deposits were found to have a significant negative effect on bank profits. The composite variable of financial services was not found to have a significant effect on bank financial performance. The results on the joint model where all the variables were included, realized a significant positive effect of financial restructuring, capital restructuring and bank size on the financial performance of banks, but asset restructuring, customer loans and bank ownership were found to have a significant negative effect on financial performance. Therefore, the research reveals that operational restructuring, and deposits did not influence banks profitability. The research concludes that the performance of most commercial banks in Kenya is determined through restructuring banks’ capital and asset quality ratios and that the size of banks is a significant variable in influencing financial performance of all banks. Managing bank restructuring together with deposits and customer loans increases profitability of commercial banks. Differences in financial performance was identified in both locally owned and foreign owned banks meaning that ownership of banks matter when it comes to influencing profitability. The study recommends that there is need to institute policy reforms geared towards viable restructuring for different banks to improve profitability and enhance financial inclusion. The study contribution in terms of the methodological aspects is that the Baron and Kenny (1986) should not be used blindly since variables not found to be significant in the absence of moderation and mediation might become significant when the moderation and mediating variables are included in the relationship. The conceptual contribution is that bank restructuring in Kenya does matter because it significantly contributes to profits.