A survey of factors that influence capital budgeting techniques among commercial banks in Kenya
Maingi, Ishamael K
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Capital budgeting decisions are primarily concerned with sizable investments in longterm assets. These assets may be tangible items such as property, plant or equipment or intangible ones such as new technology, patents or trademarks. Investments in processes such as research, design, development and testing through which new technology and new products are created. It may also be viewed as investments in intangible assets. The objectives of the study was to identify the capital budgeting techniques employed by commercial banks in Kenya and to establish the factors influencing the choice of capital budgeting techniques used by commercial banks in Kenya. To satisfy the research objective the researcher used descriptive research design. The sampling framework included all commercial banks in Kenya. The Kenya commercial banking sector has only 43 financial institutions. Due to the size of the banking industry, the whole population on banking institutions was included in this study. Thus, no sampling procedures were conducted. It was noted that in comparison to similar studies conducted elsewhere, the size of the population in this study was small. Primary data was collected from 22 respondents using structured questionnaires. The correspondence containing the questionnaire and a cover letter were addressed to top-level corporate managers heading the finance function in the institution usually referred to as the Head of Finance, or the General Manager Finance and Administration at most banks. The head of the Investment division function was identified as the most suitable person to comment on the investment appraisal process of capital project acquisition decision making process in the bank. Analysis was done using frequency tables, percentages, mean scores and cross tabulations and where appropriate the results were presented in form of pie charts and bar graphs. The findings from the responding commercial banks in Kenya indicate that net present value method is the primary criterion for commercial banks long -term projects and level of education, management experience and size of the bank among other factors influence the choice of capital budgeting techniques. The fundamental conclusion of this research is that in the banking industry, the level of usage of sophisticated techniques that integrate financial, strategic and risk analysis is lower at approximately 68.2% compared to the usage of 'traditional' quantitative appraisal techniques that focus on the financial return of an investment evaluation which is approximately 81.8%, thereby assisting top managers in commercial banks to make informed decisions for future investments. The study recommends that efficiency and effectiveness for all commercial banks requires that limited resources be put to their best use. Thus acquisition of long-term assets is an important decision for any entrepreneurial firm. For commercial banks, which have become entrepreneurial in today's competitive environment, long term investments decisions become critical to their survival.