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

Abstract

This research was undertaken in order to determine the effect of macro-economic variables on financial performance of commercial banking sector in Kenya. So far, the studies available have arrived at different findings. This study aimed at contributing to determining to what extent macro-economic variables influence financial performance of commercial banking sector in Kenya. The researcher ran a descriptive as well as a correlational study on all the commercial banks in Kenya between January 2006 and December 2015. Data was analyzed using SPSS software version 21 and was presented using graphs and frequency tables. Secondary data on quarterly bank performance was obtained from the individual banks annual financial reports while data on macro-economic variables was obtained from both Central Bank of Kenya and Kenya National Bureau of Statistics and was analyzed through multiple linear regressions. Return on assets was used to measure financial performance while quarterly interest rates, quarterly exchange rates (USD/KSH), quarterly GDP, and quarterly inflation rates were used to measure interest rates, exchange rates, GDP and inflation rates respectively. The results of the study indicated that there is a strong (R=0.792) relationship between macro-economic variables and financial performance of commercial banks. The study also recorded an adjusted R-squared value of 0.585. This implies 58.5% of the total variance in financial performance of the commercial banking sector in Kenya can be attributed to macro-economic variables. ANOVA statistics revealed that the regression model was ideal since it had a significance level of 0.001. The study further established that Interest rates and Exchange rates affect financial performance of the commercial banking sector negatively while Inflation rates and GDP affect it positively. The study recommends the commercial banking sector in Kenya should consider macro-economic variables such as rates, interest rates, exchange rates and GDP in their policy formulation to manage their effect on the financial performance of the banking sector. The Kenyan Government through the Central Bank of Kenya should come up with policies that create a conducive environment for commercial banks to operate since it will translate to economic growth.