Effect of Firm Characteristics on the Financial Performance of Commercial Banks in Kenya

Abstract

Commercial banks are always keen to record better financial performance at the end of every fiscal year. This has always been the case because financial performance is always regarded to be an important subject within the field of finance given the specific functions which commercial banks perform in the economy. As commercial banks compete for customers, the factors that play a crucial role in influencing how banks perform financially continue to attract the attention of the concerned stakeholders. The need to ensure commercial banks are able to post better or improved financial performance compels these stakeholders to study the determinants of financial performance that matter to banks and by extension concentrate on areas that need to be improved for the sake of bettering performance. Due to this concern, this study had to be designed in a way that would support the evaluation of the effect which firm characteristics have on banks’ financial performance within the Kenyan financial market. Since the objectives of the study matter, a descriptive and diagnostic research design was adopted. Out of the 39 commercial banks that had obtained the official license to serve customers in the Kenyan market by the CBK as of the 30th of September 2021, only 36 commercial banks were taken as a sample for the study. Attention was directed to the period that falls between January 2017 and December 2021, and this confirms that secondary data from the 36 commercial banks is associated with a period of five years. Regression analysis, correlation analysis, and descriptive analysis were employed in performing data analysis. The level of significance was identified in the first place before it was tested at 5 percent. The study found that liquidity, bank size, and the age of the bank are positively correlated with ROA. However, capital adequacy and asset quality were found to have a negative influence on ROA. Independent variables (liquidity, the size of the bank, capital adequacy, asset quality, and the age of the bank) would account for 36.9 percent of the variance in ROA. Out of the five independent variables, liquidity and capital adequacy were found to be statistically significant with ROA at the five percent significance level. The study recommends that commercial banks are supposed to concentrate on the major internal firm characteristics even when attention is being directed to key advancements that matter in the field of bank technology, intense competition among rival industry players, and the consolidation of banks.