Effect of Selected Macro-economic Variables on Financial Performance of the Banking Industry in Kenya

Abstract

The Kenyan banking industry has experienced a difficult macroeconomic climate, which included interest rate caps in August 2016. Other macroeconomic issues that have impacted the industry include exchange rate volatility, interest rate uncertainty and rising costs. The Kenyan currency has been on a consistent decline over the last decade and this might have ramifications for the financial industry. In addition, the country inflation levels have also fluctuated significantly. The objective purposed toestablish the impact that selected macroeconomic variables have on thefinancial performance of the Kenyan banking industry.Economic growth, interest rates, the exchange rate, and inflation were all considered independent factors in this study. The response variable that the researchers attempted to explain was the financial2performance2of the2Kenyan banking industry. The data was collected on a quarterly basis over a period of ten years (January 2011 to December 2020). A descriptive research approach was employed in the study, with a VECM-model utilized in examining the connection between variables. The data were analyzed using STATA. The study's findings yielded an R-square value of 0.7674, indicating that the chosen independent variables could explain 74.64 percent of the variance in financial performance of the Kenyan banking industry, while the remaining 23.26 percent was due to other factors not investigated in this study. The F-statistic was noteworthy at a 5% level with a p=0.0000, according to the findings of the ANOVA. This suggests that the model was adequate for explaining financial performance of the Kenyan banking industry. Further, the findings revealed that economic growth had a positive and significant influence on financial performance of the Kenyan banking industry while exchange rate had a significant negative influence. Interest rates and inflation did not exhibit a statistically substantialimpact. The study recommends the need for policy makers to enhance economic growth as this will lead to a rise in financial performance of the Kenyan banking industry. The study also recommends that there is need to manage the current levels of exchange rates since they have a major impact on financial performance2of the Kenyan banking2industry.