Effect of Macroeconomic Variables on the Financial Performance of Banking Sector

Abstract

The banking sector has continuously gained momentous growth. However, the macroeconomic factors have destabilized the sustainability of the business due to financial predicaments and global problems. In Kenya several monetary procedures have been initiated to safeguard the commercial banks from severe macroeconomic factors. The fiscal and monetary policies have been spearheaded to curb against macroeconomic challenges. Nonetheless, the unfavorable macroeconomic variable may provide avenue for immense banking problems. The objective of this research was determining the effect of macroeconomic variables on Kenya’s performance of the banking sector. The study was based on Fisher’s theory and supported by arbitrage pricing theory as well as modern portfolio theory. The independent variables were GDP growth rate, interest rate, inflation and money supply. The dependent variable that the research endeavored to describe was the financial performance of the Kenyan banking industry. The data was obtained on a quarterly basis for ten-year duration (Jan. 2012 to Dec. 2021). A descriptive research technique was applied in the research, with a multivariate regression model utilized in examining the link between the research variables. The research conclusion resulted in 0.557 R-square, signifying the selected independent variables could account for 55.7% in the Kenya financial performance variation in the banking sector, while the other 44.3 percent was as a result of other factors not explored in this research. The F statistic was significant at a 5% extent possessing a p=0.000. This indicates that the model was effective in explaining how Kenya's banking market performed. Further, the conclusions demonstrated that higher GDP growth rate yields a substantial rise in performance in the banking sector while money supply negatively affects performance. Interest rate and inflation did not possess significant effect on banking sector financial performance. The research recommends that there is need to manage GDP growth rate and money supply since they have a major impact on banking sector performance. The research further acclaims the necessity for future researchers to conduct a study for a longer period of time to capture the effects of economic cycles like recessions and booms.