Determinants of Financial Performance of Investment Banks in Kenya

Abstract

Investment banks are an important component of the economy today as they provide essential services that enable movement of capital in the economy. As a result of the global financial crisis of 2008 which triggered from collapse of investment banks in the US, there has been increased interest among scholars, policy makers, regulators and industry practitioners to better understand factors which influence financial perfonmance of investment banks, since it is believed that firms that consistently make profits are in a position to be stable during crisis periods and contribute significantly to financial stability of a country. This study explored effect of size, liquidity, leverage and operating efficiency on investment banks’ profitability. The study research design was descriptive utilizing secondary data for the years 2013 to 2017 from 10 the investment banks licensed as at the end of 2017 and were fully operational during the entire study period. Diagnostic tests were performed with a view to determine normality and multicollinearity. Descriptive statistics, correlation and regression were utilized to perform data analysis while significance was determined at 5% 1eve1. This study finds that investment bank size and leverage had an insignificant negative effect on profitability of investment banks while liquidity had an insignificant positive influence on investment bank profitability. The study also found that operating efficiency had a significant negative effect on profitability of investment banks’ expressed as a Return on Assets (ROA). It was found that independent variables studied accounts for 49.6% of the variation in profitability. The study concludes that of all determinants tested in this study, only operating efficiency significantly determined financial performance of investment banking firms in Kenya. The study recommends that managers of investment banks develop strategies to manage operating costs to be within target levels to mitigate the potential of high unplanned costs diminishing investment bank’s profitability.