Financial inclusion, bank stability, bank ownership and financial performance of commercial banks in Kenya
Financial inclusion, the process of availing financial services to all is perceived as a vehicle of achieving inclusive development and economic growth. This has led to a rise in financial inclusion initiatives in both developed and developing economies. However despite the interest in financial inclusion its effect on banks’ financial performance is not evidently known. To date empirical studies done and reviewed have revealed inconclusive and contradictory results on the effect of financial inclusion on banks performance. The objectives of this study were four and aimed at investigating the effect of financial inclusion on banks financial performance, determining how bank stability as a mediator and bank ownership as a moderator affect the effect of financial inclusion on financial performance of commercial banks in Kenya and finally establish whether the joint effect of bank stability and financial inclusion on bank performance is greater than the individual effect of financial inclusion on bank performance. Financial inclusion was measured using a composite index of financial inclusion that combined availability, penetration and usage dimensions of financial inclusiveness. Bank stability was measured by NPL and Z score while ownership was categorized as government, domestic private and foreign. Bank financial performance was measured using ROA, ROE and NIM. The banks under study were thirty in number and comprised of all the banks that were in existence and did not undergo any merger or acquisition during the nine year study period from the period 2005-2013. Commercial banks financial statements and bank supervision reports from the Central Bank of Kenya were used to capture secondary data on the study variables. Simple, hierarchical and stepwise regression analysis and correlations analysis were used for testing the study hypotheses. All tests were carried out at 5% level of significance. The regression results revealed that financial inclusion had a statistically significant effect on banks performance in Kenya. The results lacked sufficient evidence to reject the hypothesis that bank stability does not significantly mediate the effect of financial inclusion on financial performance of commercial banks in Kenya. The study results were inconclusive on the moderating effect of foreign and government ownership on the effect of financial inclusion on bank financial performance as measured by ROA and ROE but were conclusive on NIM. However the study results were conclusive on the moderating effect of domestic private ownership on the effect of financial inclusion on bank financial performance as measured by ROA and ROE but were inconclusive on NIM. Finally, the study concluded that the joint effect of financial inclusion, NPL and Z score is greater than the individual effect of financial inclusion on financial performance of commercial banks in Kenya. From the findings of the study it was recommended that commercial banks should take an active role in increasing financial inclusion as it is supports the profit motive. Finally the study recommended that financial inclusion should be addressed with other factors when examining its effect on financial performance. The study identified two research gaps that can guide future research, firstly, need for an index of financial inclusion that incorporates the new delivery channels and quality of financial services provided to capture the actual levels of financial inclusion. Secondly the need for a comparative study on MFIs and other non bank financial institutions and commercial banks can be done to find out the two is best institution suited to drive the financial inclusion agenda or/and how synergies can be created.