DETERMINANTS OF FINANCIAL PERFORMANCE OF COMMERCIAL BANKS LISTED IN NAIROBI SECURITIES EXCHANGE, 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. According to the Financial stability report released in 2020, despite the resilience across the Kenyan banks, they were still experiencing increased non-performing loans affecting their profitability. The resolve of the study is to investigate the effect of bank specific and macroeconomic determinants on financial performance of commercial banks listed in Nairobi Securities Exchange, Kenya. The study is guided by the following specific objectives; to determine the effect of bank capital, bank assets, bank tax, bank debt ratio, bank concentration, inflation rate and lending interest rate on financial performance of commercial banks listed in Nairobi Securities Exchange, Kenya. The study was anchored on transaction cost economic theory and inverted U hypothesis. Longitudinal research design approach was adopted with panel secondary data spanning from the period 2011-2020. Stationarity, normality, heteroscedasticity, multicollinearity and serial correlation diagnostic tests were performed. Data was examined using STATA software and results were presented in form of descriptive and inferential statistics. Hausman test results suggested a fixed effect estimation model was appropriate over random effect model. Regression analysis established that, total bank assets (β1 = .06, p = .000 < .05), bank capital (β1 = 7.7, p = .000 < .05), and debt ratio (β1 = .06, p = .000 < .05) had a positive and significant effect on financial performance while bank concentration (β1 =. −.001, p = 0.012 < .05) had a negative and significant effect on performance. The study recommends that banks ought to adopt strategic asset management for better asset allocation. Government oversight is crucial to prevent crises like Chase Bank in Kenya. Banks should prioritize efficient capital allocation and diversification. Additionally, on the effect of bank taxes, the government should implement counter- cyclical policies to reduce risks during economic downturns. Further research could investigate industry-specific factors impacting banking profitability, extend case studies to specific banks, and explore the influence of behavioral economics principles on consumer financial decisions, product design, and profit margins