The Effects of Selected Macroeconomic Variables on the Financial Performance of the Banking Industry in Kenya

Abstract

The macroeconomic variables affect the financial performance of any organization that seeks to make profit and maximize its shareholders wealth. Globally, no organization can claim to operate in a vacuum and regardless of its nature it will be affected by either internal or external variables or both. It is therefore paramount for the stakeholders to understand how these factors affect their performance to mitigate against any adverse effect that may arise from them. Macroeconomic variables are a strong determinant of the bank’s financial performance. With the number of banks increasing over the years and the competition for customers increases, an analysis of how macroeconomic variables influence bank’s financial performance is important. Investors strongly believe that macro-economic variables largely influence volatility of financial performance. This study sought to determine the effect of selected macro-economic variables on financial performance of banking industry in Kenya. The population for the study was all the 42 commercial banks operating in Kenya. The independent variables for the study were interest rates as measured by CBK lending rate, economic growth as measured by GDP, exchange rates as measured by KSH/USD and inflation rate as measured by the CPI. Financial performance was the dependent variable and was measured by Return on Assets (ROA). Secondary data was collected for a period of 10 years (January 2007 to December 2016) on a quarterly basis. The study employed a descriptive case study research design and a multiple linear regression model was used to analyze the relationship between the variables. Statistical package for social sciences version 21 was used for data analysis purposes. The results of the study produced R-square value of 0.346 which means that about 34.6 percent of the variation in financial performance of the banking industry in Kenya can be explained by the four selected independent variables while 65.4 percent in the variation of financial performance was associated with other factors not covered in this research. The study also found that the independent variables had a strong correlation with financial performance (R=0.589). ANOVA results show that the F statistic was significant at 5% level with a p=0.000. Therefore, the model was fit to explain the relationship between the selected variables. The results further revealed that none of the selected independent variables (interest rates, economic growth, exchange rates and inflation rates) were individually statistically significant in explaining financial performance of the banking industry in Kenya. This study recommended that adequate measures should be put into place to improve and grow financial performance of banking industry in Kenya.