Effect of Bank Specific Characteristics on Financial Performance of Commercial Banks in Kenya

Abstract

Central in finance field is financial performance. The need to explain how two firms operating within the same environment perform differently is a concern and several research works in finance have been devoted towards understanding this mystery. This led to studies which focus on various internal factors and external issues thought to be the cause of differing financial performance. The intent of this inquiry was the determination of how bank specific characteristics influence FP of Kenyan banks. 42 banks in operation as at 31st December 2018 were the population of the study. Data from 38 banks was availed for the study which was 90.48% response rate. The predictor variables were asset quality, capital adequacy, liquidity, bank size and bank age. FP was given by ROA and it was the response variable. Secondary data was acquired for 5 years (January 2014 to December 2018) on an annual basis. Research design was descriptive cross-sectional design whereas association between variables was determined by multiple linear regression model. SPSS version 22 was used in data analysis. An R-square value of 0.339 that can be translated to mean 33.9% of the variations in financial performance of Kenyan banks can be related to the five chosen predictor variables whereas 66.1% in the changes of financial performance of banks was linked to other variables that did not form part of this study. From the study it was further revealed that the predictor variables strongly correlated with FP (R=0.583). ANOVA analysis revealed the F statistic was substantial at 5% level with a p=0.000. Henceforth, the model was appropriate in providing an explanation of the relationship between the variables. Additionally, results demonstrated that capital adequacy together with bank size were positively and statistically substantial values in this study while asset quality is negatively and statistically substantial alteration on performance. The study discovered that liquidity and age have a statistically unsubstantial influence on FP of banks. The recommendation is that measures should be set up to increase capital adequacy and bank size while simultaneously reducing credit risk as these three has a significant impact on FP. The study further recommends that future researchers should focus on other factors that explain 66.1% of changes in financial performance of banks in Kenya.