The Effect of Macroeconomic Variables on the Financial Performance of Commercial Banks in Kenya

Abstract

The purpose of this study was to determine the effect of macroeconomic variables on the financial performance of commercial banks in Kenya. Previously, studies have been done on the effect of macroeconomic variables on financial performance of commercial banks, microfinance institutions and aviation sector among other industries, but there is no consensus and the results and findings indicate divergent views among different researchers. The measure of financial performance used was return on assets (ROA) measured against the macroeconomic variables like inflation rate, foreign exchange rate gross domestic product (GDP), and lending rate while controlling for effect of asset quality, management efficiency and capital adequacy. The research design used was the descriptive research design. The research study population comprised all the forty two commercial banks in Kenya that are licensed by the Central Bank of Kenya (CBK). A sample of twenty two commercial banks was drawn using stratified random sampling. Secondary data covering a period of five years from 2011 to 2015 was sourced from the study sample. The data was obtained from published annual reports and financial statements of the commercial banks, the Kenya National Bureau of Statistics periodic reports, and Central Bank of Kenya annual reports. The study used regression analysis in examining how macroeconomic variables affect the financial performance of commercial banks in Kenya. The data was analyzed using SPSS. The findings of the study indicate financial performance (measured using return on assets ratio) of commercial banks in Kenya has a strong positive correlation with changes in macroeconomic variables as inferred from the correlation coefficient of 0.768. The main recommendation by the researcher is that bank managers should keep lending rates as stable as possible. The findings are important to various stakeholders both in and out of the Kenyan banking industry including other researchers, bank managers, fund managers, potential investors and financial analysts and the Government.