Factors Influencing Financial Performance of Commercial Banks in Kenya- A Case Study of National Bank of Kenya Coast Region

Abstract

The financial performance of commercial banks in Kenya is very important as it helps it to know the bank is achieving its set objectives and also its profit margin, however banks faces several challenges as they strive to achieve the performance such include; competition from other organizations, government policies, increased provisions through non- performing assets and also increased interest costs. The main objective of this study was to identify, analyze and understand the factors that influence the financial performance of all commercial banks in Kenya. It also aims at revealing the indicators of financial performance, reasons, criteria and systems of determining financial performance of commercial Banks in Kenya. The specific objectives are capital adequacy and liquidity, credit risk, interest rate and inflation rates and their influence on financial performance of commercial banks in Kenya. The research design was descriptive in nature. The target population was 1,700 staff of National Bank of Kenya in Coast region. The sample size was 51. Market power theory, efficiency structure theory and portfolio theory have been used to explain the theoretical framework. A pilot study was carried out to refine the instrument. The quality and consistency of the survey was further assessed using Cronbach's alpha. Data analysis will be performed on a computer using Statistical Package for Social Science (SPSS Version 22) for Windows. Analysis was done using frequency counts, percentages, means and standard deviation, regression, correlation and the information generated will be presented in form of graphs, charts and tables. From the findings majority of respondents have worked for between 3-6 years, on education level, majority of the respondents have a bachelor's degree and work as head of departments in the bank. Change in capital requirement affects financial performance of commercial banks because fund that were to be lend out to earn interest income are put up as capital thus denying commercial banks revenue. Bad economic times affect how customers repay their credit facilities thus causing loan defaulter. When inflation is rising, consumer purchasing power is greatly reduced because many people are not able to borrow and invest and eventually repay loans. Charging different interest rate s affects profitability. According to the findings, it was clear that there was a positive correlation between capital adequacy, credit risk, inflation and interest rates shown by a correlation value of 0.370, 0.376, 0.120 and 0.364 respectively. This indicates that independent variable and dependent variable move in the same direction, that is, as one increase the other one also increases. From the finding R² has a value of 0.682 meaning that the 46.5 % of the dependent variable can be explained or attributed to combination of the four independent factors investigated in this study. A further 5.3 % of investment decision making is attributed to other factors not investigated here. That Central bank of Kenya should reduce cash ratio requirement from 20% to 5% to enable commercial banks to have more disposable funds to lend to earn interest income thus increase its profitability.