The Effect of Macro-economic Variables on Financial Performance of Commercial Banking Sector in Kenya

Abstract

In financial history, banks are known to be necessary for the overall system. Banks, mobilize savings and demand deposits and extend credit, on the other. In this way, they turn illiquid assets into liquid assets. The interrelation between macroeconomic factors, which refer to the banking system environment where it functions, has been debated by scholars, which also includes the operations of firms in the current phenomenon. It is frequently concluded that some core factors, which are macroeconomic, for instance, the impact brought about by inflation, fluctuating interest charges, and currency exchange ratio, are causes of how a company performs. This study thus going to analyse the impression of macro-variables on the fiscal performance of profitmaking banking sector in Kenya. The efficient market hypothesis, modern portfolio theory, and behavioural finance theory were reviewed as strategic fundamental theories guiding the study. This study combines a mixed research design that is designed to use descriptive and correlational research methods. The research employed secondary statistics that has been composed from macroeconomic variable. It is these statistics that are then used in the process of calculating the value of real gross domestic product (GDP), lending interest ratio applied by banking institutions as well as the prevailing exchange ratio. This able to correlate with the used consumer price index for price changes. The statistics that were used were collected from a period of ten years between 2009 and 2018. Data were examined through the procedure of descriptive statistics plus inferential statistics. These combine to develop the correlation and multiple regression analysis. The study revealed the existence of a significant as well as confident affiliation between real GDP and ROA, whereas the association between interest rates and ROA was positive but insignificant, respectively. The results further show the association between price increases and ROA was positive and significant, while the relationship between the exchange rate and ROA was negative and insignificant, respectively. The study concluded that there was a significant and positive relation between Real GDP, inflation, and commercial banks' financial performance but a negligible relationship between the interest rate and exchange rates and bank performance. The study recommended that the government should ensure that they are continuous growth of the economy to enhance the profitability of the banking sector since this sector is an important sector that enhances financial intermediation. The study also endorsed that the management of moneymaking banks has to set favourable interest rates so that they can lend to businesses and individuals, which in turn enhances interest income. Besides, the study recommended that the central bank should undertake measures to combat inflation to ensure that it does not harm the fiscal outcomes of institutions.