Effect of Selected Internal Factors on Financial Performance of Commercial Banks in Kenya

Abstract

The banking sector in a nation plays a significant character in the distribution of economic resources and thus contributes to the growth in the economy through the provision of resources to lenders and the deepening of finance in the nation. From the finding, the financial performance of a bank is critical not only for the investors, but also for the entire economy of a nation and interdependent countries. The aim of the study was to determine the internal influences affecting the financial performance of commercial banks in Kenya. Explanatory variables of the study representing inner factors comprise of liquidity, bank size, loan advancement and financial risk. The financial performance of commercial banks was evaluated by the return on capital. The research was based on a descriptive research design and the study population was 40 commercial banks in Kenya. The research used secondary information from the financial statements of commercial banks for the period 2014 to 2018. Data from 30 commercial banks with data available for the five-year investigation period were analysed using descriptive measures of mean and standard deviation. The results of the study illustration that there is a constructive and important relationship between the liquidity, cost-income ratio and the commercial banks financial performance in Kenya with p-values of 0.04 and 0.01 correspondingly. In addition, credit risk and organisation size had a constructive relationship with financial performance, although the relationship was negligible since their p-values were smaller than the cut-off point. Nevertheless, the loan advances were found to have a destructive and negligible relationship with the quality of commercial banks in Kenya. Considering the combined influence of the variables on the financial performance of the banks, the cost-income ratio had the highest positive influence, while the company scale had the least positive impact. The study found that the combined effect of the variables on the performance of commercial banks was 11.4%.