Factors Affecting Profitability of Commercial Banks in Kenya

Abstract

The purpose of this research was to examine the factors that affect Kenyan's commercial banks' profitability. Its objectives were to determine whether market share, non-performing loans, capital adequacy and corporate governance affect the profitability of Kenya's commercial banks. The research was anchored on three theories which included, Dynamic Capability Theory, Crisis Management Theory and Modern Portfolio Theory. The study adopted descriptive study design. The target population of the study was all the licenced commercial banks in Kenya. All the licenced banks were used in data collection therefore, the study used census sampling technique. The study period was five years from 2017 to 2021. To accomplish this, the study gathered secondary data from CBK website using bank supervision annual reports as well as annual financial reports from the websites of the various banks in Kenya. For data analysis purposes, this inquiry employed both inferential and descriptive statistics which was aided by the Stata software. The former consisted of standard deviation, mean, minimum value and maximum value. On the other side, the former comprised of correlational analysis and the Hausman specification test for fixed and random effect. The findings of the Hausman specifications test revealed that the random effect framework was the most suitable model for the investigation. All the diagnostic tests indicated that no assumption of linear regression was violated thus the derived regression equation was suitable for the study. The study Correlation analysis and panel regression analysis results showed that, market share, capital adequacy and corporate governance had a positive and significant effect on the commercial banks’ profitability in Kenya with regression coefficient of 0.5742, 0.2721, 0.4742 and p-values of 0.000, 0.002, and 0.000 respectively. Non-performing loans exerted a detrimental and statistically significant influence on the profitability of the aforementioned banks. This was supported by regression coefficient of -0.4510 and p- value of 0.001. Both inferential and descriptive statistics were employed to analyze the panel data. The findings of the study indicate that the chosen variables exerted a noteworthy influence on the financial performance of the designated banks with an R2 of 0.5532 which implied that the selected factors explain 55.32% of the targeted commercial banks’ profitability in Kenya. The study therefore recommended that Kenya’s commercial banks must make a point of enhancing their market share, capital adequacy and corporate governance as they had positive and significant effect in determining their profitability. The study also recommends that commercial banks should work to reduce the levels of non-performing loans since they affect profitability negatively.