Effect of Firm Size on Financial Performance of Commercial Banks in Kenya

Abstract

Larger firms’ performance is expected to be better than for smaller entities. This is due to their ability to harness market power and existence of economies of scale and scope. By attracting more customers, increasing the asset base and issuing new loans banks grow in size. As these banks grow, their performance improves and their risk diminishes (Joleski, 2017). Theoretically, it is expected that: the larger the bank, the higher the performance and the lower the risks associated with doing business. This study sought to investigate how firm size influences the financial performance of commercial banks in Kenya. The independent variable for the research was firm size measured using natural logarithm of total assets. Credit risk, liquidity and capital adequacy were the control variables while the dependent variable was financial performance measured using ROA. The study was guided by stakeholder theory, financial intermediation theory as well as behavioural theory of firm growth. Descriptive research design was utilized in this research. The 41 commercial banks in Kenya as at December 2021 served as target population. The study collected secondary data for five years (2017-2021) on an annual basis from CBK and individual banks annual reports. Descriptive, correlation as well as regression analysis were undertaken and outcomes offered in tables followed by pertinent interpretation and discussion. The research conclusions yielded a 0.604 R square value implying that 60.4% of changes in banks ROA can be described by the four variables chosen for this research. The multivariate regression analysis further revealed that individually, firm size has a positive and significant effect on ROA of banks (β=0.484, p=0.000). Credit risk exhibited a negative effect on ROA of banks as shown by (β=-0.346, p=0.000). Liquidity and capital adequacy exhibited a positive and significant influence on ROA of banks in Kenya as shown by (β=0.318, p=0.000) and (β=0.282, p=0.000) respectively. The study recommends the need for banks to grow their asset base as this will enable them to enjoy economies of scale leading to a rise in financial performance. The policy makers such as CBK should come up with policy guidelines to direct firms on ways to enhance their asset base without risking their financial performance.