Funding Sources, Competitiveness, Firm Size and Performance of Commercial Banks in Kenya

Abstract

The nature of the funding source a commercial bank decides to adopt is a key performance determinant. Ideally, banks make use of either shareholders’ equity, borrowed funds, or customers' deposits to finance their operations. The liberalization in the sector has made it possible for many players (ranging from the smallest to the biggest of them in terms of size) to exist and as a result, each player has had to come up with a unique competitive way that allows them to attract and retain the best funding sources capable of yielding positive performance. Much as there are studies that have sought to investigate the concept of funding and performance in the corporate world for both developing and developed economies, this study focused on establishing the specific nature of relationships among funding sources, competitiveness, firm size and performance of commercial banks in Kenya. The study sought to establish how sources of funding influence the performance of these commercial banks, moreover, it further sought to determine the mediating and the moderating effect of competitiveness and firm size respectively on the relationship between funding sources and performance together with the need to determine the combined effect of funding sources, competitiveness and bank size on the performance of these banks. Pecking order theory was used as the anchoring theory since it supports the argument raised in this study by postulating that there is a financial responsibility on the side of the management to rank the available funding options and the one found to give the firm more benefit will be deployed first followed by other funding sources as more deployment may be required. A descriptive research design that conforms with a positivist research philosophy was adopted and used to evaluate the four hypotheses formulated for each of the study’s objectives. Secondary data obtained from 35 commercial banks operating in Kenya was gathered between the years 2011 to 2021. The findings obtained revealed a direct significant association between commercials’ bank performance and their funding sources as depicted by the overall F-statistics probability of 0.0000, both r-squared value and adjusted r-squared value of 0.596996 and 0.553650 respectively. On the other hand, the competitiveness of a bank was discovered to intervene in the relationship between commercials’ bank performance and their funding sources. Bank size was found to be a moderator in the relationship between a bank’s funding source and their performance only if customers' deposit is used as a source of funding, and the contrary is true if either deposit due to other banks or shareholders' equity is used as a funding source. For joint effect, an inspection of individual variables within the model further indicates a statistically non-significant in three out of the five explanatory variables under consideration that is, two explanatory variables that were found to have a statistically significant association were both shareholders’ equity and log total assets. As a result of these findings, there is a need for bank managers to adopt techniques that enable them to source funds with relative ease and at a cheaper cost as this will enable them to maximize their profit and hence enhance performance. Managers must therefore develop a financial policy that guides them in choosing a particular funding source while taking into consideration the fluctuation of business volume, the character of the firm’s asset, the level of competition, firm size, and expected stability of profit among others. In addition, banks’ management must be cognizant of the fact that relying on customers' deposits for long-term funding may prove to be catastrophic if there is an avalanche of requests for withdrawal within a short period as this has in the past destabilized some banks.