Determinants of profitability among Kenya's NSE listed banks
Banking has long been recognized as an important component in economic development. Kenya's banking sector has undergone through significant performance changes in the past few years, recording tremendous improvements in key indicator variables. However, some banks have grown more and faster than others. This has been the case among both listed and non-listed banks. This study analyzes the profitability of a sample of Kenya's publicly quoted commercial banks over the time period from 1998 to 2007. Besides bank specific characteristics, the study included a set of macroeconomic variables into the regression analyses. The primary advantage of panel over cross-sectional regression stems from its control for the effects of omitted variables or unobserved heterogeneity. The results revealed existence of significant differences in profitability among commercial banks listed in Kenya's Nairobi Stock Exchange. Additionally, the study shows that these differences can to a large extent be explained by the factors included in the analysis. First, individual bank characteristics explain a substantial part of the within-country variation in bank profitability. Profitability tends to be associated with banks that hold a relatively high amount of capital, and with large overheads. Other important internal determinants of banks profitability is bank loans which have a positive and significant impact while bank size has mostly negative and significant coefficients. This latter result may simply reflect scale inefficiencies. Second, the paper finds that the macro-economic indicators such inflation and GDP growth rates have little impact on bank's profitability.