The relationship between size and financial performance of Commercial Banks in Kenya
Interest income from loans is the major source of revenue for commercial banks in Kenya but the loan book and deposit book are not the only determinants of financial performance. Total bank assets and total deposits facilitate huge loan books and interest revenues but other factors that affect cost efficiency must be controlled for the high revenue figures to translate into high levels of financial performance. Large institution size banks have greater access to large wholesale deposits and have greater power to control cost of deposits and lending rates but these advantages can only be translated into good financial performance with accompanying cost efficiency. Large branch networks provide proximity convenience that may result in higher deposits but the cost of operating such large branch networks, if economies of scale are not exploited, will impact negatively on financial performance. The objective of the study was to determine the relationship between Bank Size and Financial Performance of commercial banks in Kenya. The study specifically aimed at determining the relationship between Bank Size factors, namely, Total Deposits, Total Loans, and Total Assets, and Financial Performance, and went further to investigate the relationship between Branch Network Size and Financial Performance. The study adopted the Descriptive Design. Correlation Analysis, and Multiple and Simple Linear regressions were applied to secondary data collected from available financial statements of all the 43 commercial banks in existence in Kenya as at 31 st December, 2011. The period the study covered was the year 2000 to the year 2011. The main findings of the study established strong correlations between all the studied factors of Bank Size. Total Deposits, Total Loans, Total Assets and Branch Network Size were all found to be correlated. The relationship between three of the size variables, namely, Total Loans, Total Deposits, and Total Assets and the Financial Performance of commercial banks were all found to be weak but statistically significant, Total Deposits and Total Assets had relatively stronger effects on Financial Performance compared to Total Loans. No relationship was found between Branch Network Size and Financial Performance for commercial banks in Kenya. The recommendations from the study include the need for bank policies that give greater importance to the determination and monitoring of individual branch and head office unit financial performance. Policies that clearly define the lowest performance levels below which a branch should be replaced by alternative channels are necessary. The overall financial performance of a bank is the sum of the performance of the individual branches and units of the bank. Further studies that incorporate other performance factors, including branch cost efficiency is recommended to give a clearer picture on the effects of this key factor in addition to the factors considered in this study.