Determinants of financial performance of commercial Banks in Kenya.

Abstract

Commercial banks financial performance in Kenya is an important subject given the significant role the banks play in the economy. With the number of banks increasing over the years and competition for customers increase, an analysis of what factors influence banks’ financial performance is important to the banks as this can aid them in ascertaining the determinants of performance and by extension know the areas to improve in order to perform better. This study was designed to examine the determinants of financial performance of commercial banks in Kenya. In order to achieve the objectives of this study, the research was designed as an explanatory study. The population was all the 43 commercial banks by December 2011. All the banks were used in the study. A ten year secondary data from 2001 to 2010 was collected from Banking Survey and the Central Bank of Kenya. Descriptive analysis, correlation analysis and regression analysis were used to perform the data analysis. Significance was tested at 5% level. The study found that capital adequacy and exchange rates were negatively correlated with ROE while liquidity, operating cost efficiency, size, risk, GDP, and inflation had a positive influence on ROE. Overall, the independent variables accounted for 95.3% of the variance in ROE. Further, the results revealed that exchange rate was negatively related with ROA while capital adequacy, liquidity, operating cost efficiency, size, risk, GDP, and inflation had positive effects on ROA. It was noted that the independent variables accounted for 95.6% of the variance in ROA. However, none of these effects were significant at 5% level of confidence. None of the models was al influence on the financial performance of commercial banks in Kenya. The study recommends that there is need for commercial banks to improve their performance in terms of their ROEs and ROAs. The study also recommends that banks should improve on their liquidity more so the ability of the banks to promptly repay the depositors.