The effect of bank specific factors on financial performance of commercial banks in Kenya

Abstract

The main goal of every banking institution is to operate profitably in order to maintain stability and sustainable growth. External and internal economic environments are viewed as critical drivers for bank performance. The main purpose of this study was to determine the effects of bank specific factors on the financial performance of commercial banks in Kenya for a period of 5 years, starting from the year 2011 to 2015. The dependent variable under investigation was return on assets (ROA). The independent variables were capital adequacy, asset quality, management efficiency, earnings ability and liquidity. The specific objectives of this research were to determine the effects of capital adequacy on the financial performance of commercial banks in Kenya, evaluate the effects of asset quality on the financial performance of commercial banks in Kenya, determine the impact of management efficiency on the financial performance of commercial banks in Kenya, determine the impact of earnings ability on the financial performance of commercial banks in Kenya and evaluate the effects of liquidity on the financial performance of commercial banks in Kenya. The choice of this five-year period was based on the explosive growth of the banking sector in the country and the availability of complete data for that period. The study concentrated on the bank specific factors that affect the banks’ financial performance. In this research, the scope was all the 11 banks listed in the Nairobi securities exchange. This study adopted an explanatory approach by using panel data research design to fulfill the objectives. The researcher collected data on published financial statements of the 11 commercial banks listed in the Nairobi securities exchange for five years from 2011 to 2015.Data was analyzed using multiple linear regression models to show the effect of bank specific factors on financial performance of commercial banks over that period under study. The findings were presented in tables and narratives. The results showed that there was positive and significant association between ROA and all the independent factors. The results showed that there has been a significant decrease in capital adequacy during the five-year period. There was also a finding that asset quality affects profitability and the financial performance of banks. The study concludes that Asset quality of the bank have the highest influence on ROA of banks. The study recommends that efficient and effective management should be adopted by bank managers to ensure that banks do not become insolvent.