Bank Performance: Does Bank Size Matter?

Abstract

Economic theory suggests that if larger banks have a greater control of the domestic market, and operate in a non-competitive environment, lending rates may remain high while deposit rates for larger institutions remain lower because they are perceived to be safer. Thus, larger banks may enjoy higher profits but empirical evidence remains inconclusive. This study sought to establish the impact of bank size on commercial bank performance in Kenya. Using panel data for the period 2007-2014 we employed system generalized method of moment (GMM) estimation technique in order to overcome the endogeneity problem. The empirical findings show that for the case of commercial banks in Kenya, size does not matter in determining bank profitability. This implies that although scale economies are important for profitability, local markets in Kenya do not always allow such scale economies to translate to higher profitability. The control variables lagged profitability, market concentration, GDP growth and inflation were all significant in explaining bank profitability.