The effect of level of deposits on financial performance of Commercial Banks in Kenya

Abstract

The study was on the effect of the level of deposits on financial performance of commercial banks in Kenya. The main issue was that there had been a gradual rise in customer deposits in Kenya. The profitability of the banking sector has also been on the rise. So, the empirical problem was whether there exists a relationship between the customer deposits and banks profitability. The problem of the study and the research gap is based on the observation that there exists conflicting evidence of the effect of deposits on bank financial performance. Some evidence shows a negative effect, others show a positive effect while others show no effect at all. The study adopted a causal research design. The population of the study were all 44 commercial banks. The study used secondary data (spanning 8 years from 2004 to 2011) from the banking supervision department of central bank. A cross sectional regression model was adapted. The regressions were conducted using statistical package for social sciences (SPSS) version 17. Regression results indicate that there is a positive and significant relationship between Deposits Ratio and ROE. The results also indicate that there is a positive and significant relationship between Deposits Ratio and ROA. Following study results, it is recommended that commercial banks in Kenya should invest in attracting more low cost deposits by adopting alternative banking channels innovation such as Mpesa and agency banking in order to attract deposits at the lowest cost possible and to reduce costs associated with other forms of deposit mobilization.