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Submitted by: Usha Panth(13123)

Determinants of Financial Performance of Commercial Banks in Kenya

Background and purpose of the study:
This journal titled Determinants of Financial Performance of Commercial Banks in Kenya was
done by Vincent Okoth Ongore and Gemechu Berhanu Kusa. As we know that commercial bank
are the backbone of any country and their sustainable depends on their performance and
profitability. Financial Performance will determine the economic status of the country
Performance of bank can be affected by external (macroeconomic factors) and internal (bank
specific) factors. The moderating role of ownership identity on the performance if commercial
bank in Kenya was not studied so; this study was done to fulfill this gap. The purpose of the
study is

To examine the (internal and external) factors affecting the financial performance of the
commercial bank in Kenya.
To examine whether ownership (foreign and domestic) identify significantly moderate
the relationship between commercial banks financial performance and its determinants in
Kenya or not.

Literature review:
In late 1980, worldwide had experience the major transformation in its operating environment
which caused the foreign bank presence in other countries across the globe and it has been
increasing tremendously with establishment of branches and subsidiaries in different part of the
world. On the contrary, the number of domestic bank performance in relation to (Claessens and
Hore, 2012). This became the interest of the study of the researcher. According to Athanasoglu et
al., (2005) the internal factors include bank size, capital, management efficiency and risk
management and the overall policy decision and the same scholar contend that the major external
factors that influence bank performance are macroeconomic variables such as interest rate,
inflation, economic growth and other factors like ownership. Indicators of bank performance are
ROE, ROA, and Net Interest Margin (Murthy and Sree, 2003; Alexandru et al., 2008).
Determinants of bank performance include internal which includes bank specific factors such as
capital adequacy, asset quality, management efficiency and liquidity management; and external
factors such as policy stability, GDP, inflation, Interest rate and political instability (A1-Tamini,
2010; Aburime, 2005). In addition to these factors, relationship between ownership and
performance is one of the key issues in corporate governance which has been the subject of
ongoing debate in the corporate finance literacy. This theory deals with the owners and
managers relationship, which one way or the other refers to ownership and performance.
Dependent performance indicator such as ROA, ROE and Net Interest Margin was used while
independent variable are classified as bank specific variable such as capital adequacy, asset
quality management efficiency; and liquidity status and macroeconomic variable which includes
GDP growth rate, inflation growth.

Submitted by: Usha Panth(13123)

Research design: This explanatory study is based on secondary data obtained from published
statements of accounts of all commercial bank in Kenya, CBK, IMF, World Bank publications
for ten years. Panel data has been used to study the behavior of each bank over time and across
Unit of analysis: Organization has been taken as unit of analysis that includes the domestic and
foreign commercial banks.
Sample Design: This study considered 37 commercial banks, out of which 13 are foreign owned
banks and 24 owned by locals.
Data collection, Analysis and presentation: secondary data were used. Data was analyzed
through Microsoft excel, econometric view (e-views) software. Multiple linear regression model
and t-statistics were used to identify the relative importance of each explanatory variable in
affecting performance of bank. Ownership was taken as dummy variable.
To check for normality, descriptive statistics were used, Kurtosis and Skewness of the
distribution of the data were examined and multicollinearity was tested for the correlation of the
dependent and independent variables by variance inflation factor and correlation coefficient. To
avoid the problem of heteroscedasticity of disturbance terms, Weighted Least Square (GLS) was
employed in establishing the relationship.
Findings and conclusion:
This study showed that the capital adequacy, asset quality and management efficiency
significantly affect the performance of commercial banks in Kenya. However the effect of
liquidity on performance of commercial bank is not strong. Talking about the relationship
between the performance and capital adequacy and management efficiency, it was found to be
positive and negative relationship with asset quality. From these findings we can draw our
conclusion that the performance of the bank mainly depends on the capital, management
efficiency and asset quality rather than the keeping high liquid asset. We can also conclude that
bank which has high asset quality and low non-performing loans have are more profitable than
others. The direction and effect of macroeconomic variables on the performance of commercial
bank in Kenya from 2001 to 2010 was inconclusive. From the study it was found that ROA and
GDP had negative correlation while positive relationship between GDP and ROE. Moreover the
relationship was not significant. Other macroeconomic variable, inflation has strong negative
correlation with financial performance of the commercial banks in Kenya compared to GDP.
Talking about the moderating variable i.e. role of ownership identify on the overall performance
of commercial bank in Kenya was not significant. To sum up, it can be concluded from the study
that bank specific factors are the most significant determinants of the financial performance of
the commercial bank in Kenya. So, the study supports and is in line with efficiency structure
theory which states that enhance managerial efficiency leads to higher performance.