PHD-Department of Accounting and Finance

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Determinants of lease financing decisions by non-financial firms quoted on Nairobi Securities Exchange, Kenya.
(2014-03-06) Simiyu, Mungami Eddie; Ombuki, C.; Wawire, N. H. W.
Access to finance remains a key issue for firms in emerging markets, Kenya included. 60 per cent of firms in Kenya consider access to finance as major barrier to growth. One of the solutions this problem is the use of lease fmance. However, access to lease finance is determined by various factors that this study investigated. The specific objectives' of the study were; to analyze the effect of company specific factors on leasing decisions corporate environment, assess the effect of corporate governance on leasing decisions and determine the effect of lease specific environment factors on leasing decisions by firms quoted on Nairobi Securities Exchange. Mann-whitney test, Pearson correlation and logit model were used find out the effect of share ownership structure; debt capacity; level of profitability; size; cash flow conservation; legal environment; accounting treatment; chief executive share ownership; institutional investor ratio; cross listing; liquidity; tobin q; cashflow; cost of funds; industrial type; effective tax; investment opportunities and growth; agency problem (Industry Factor), availability of secondary market; pricing, bankruptcy costs, risk sharing, access to capital market, regulatory environment, and judicial efficiency on lease financing decisions by non-financial firms quoted on the Nairobi Securities Exchange. The research design was descriptive. The study used triangulation approach where both secondary and primary data were collected. Secondary data were collected through a desk review of the financial statements of all nonfinancial companiesfor the period between 2004 to 2009, Primary data were collected using a questionnaire, in which both open-ended and closed-ended questions were administered to all 40 non-financial companies, The questionnaires were dropped and picked by the researcher and a trained research assistant. Univariate analysis was done using descriptive statistics, Mann-whitney tests and Chi-square test. Multivariate analysis was done using panel logit regression. The results indicated that cost of capital, financial distress, size, share ownership, management compensation, total debt ratio, chief executive share ownership were important in explaining lease decisions in the case of operating leases and cost of capital, size, performance, management compensation, chief executive share ownership were important for capital leasing decision. The results of the study indicated that just like in developed countries effective tax rate and size of the firms were important in making leasing decision. However, financial distress and leverage were not major consideration by firms in making leasing decision.
Effect of Financing Decisions on Performance of Nonfinancial Companies Listed in the Nairobi Securities Exchange, Kenya
(Kenyatta University, 2014-06) Mwangi, Lucy Wamugo
Corporate failure among companies in Kenya has often been associated with the financing behaviour of the firms. Momentous efforts to revive the ailing and liquidating companies have focused on financial restructuring. Corporate managers, therefore, have the critical responsibility of understanding how alternative financing decisions influence performance so that they can work towards securing successful performance while also mitigating against corporate failure. Suboptimal financing decisions can lead to corporate failure. A great dilemma for management and investors alike is whether there exists an optimal financing policy and how various financing decisions influence business performance. This study therefore investigated the effect of financing decisions on the performance of non-financial companies listed in the Nairobi Securities Exchange (NSE), Kenya, in a bid to offer a solution to this dilemma. The study further sought to establish the interaction effects of the various components of financing decisions on the performance of non-financial companies listed in the NSE. In order to provide a holistic solution, the thesis additionally evaluated the mediating role of internal cash flow available on the relationship between financing decisions and performance. The study employed an explanatory non- experimental research design. A census of 42 non-financial companies listed in the Nairobi Securities Exchange, Kenya was taken. The study used secondary panel data contained in the annual reports and financial statements of listed non-financial companies. The data were extracted from the Nairobi Securities Exchange hand books for the period 2006-2012.The study applied panel data models (random effects) based on the outcome of Hausman specification tests to determine the effect of financing decisions on performance of non-financial companies listed on the NSE, Kenya. The mediating effect of internal cash flow available was tested using the step-wise regression technique by employing the logic of Baron and Kenny (1986). Feasible Generalised Least Square (FGLS) regression results revealed that financial leverage had a statistically insignificant negative association with return on assets (ROA), but a significant negative relationship with return on equity (ROE).Increased aggressiveness in financing policy had a positive effect on both measures of performance while increased aggressive investing policy was found to affect performance positively. Dividend policy had a statistically 'significant positive effect on ROA but an insignificant negative effect on ROE. The study also found that the interaction between the financing decision components had a significant effect on performance. Furthermore, the results of Sobel-Goodman mediation test indicated that internal cash flow available had no mediating effect on the relationship between financing decisions and performance of non-financial companies listed in the NSE. The study recommends that managers of listed non-financial companies should reduce the reliance on long term debt as a source of finance. Further it is recommended that an aggressive financing policy and a conservative investing policy should be employed to enhance the performance of non-financial companies listed in the NSE, Kenya. The government should employ fiscal and monetary policies through the central bank to reduce the cost of borrowing from financial institutions. Most importantly managers should make financing decisions in relation to each other and not in isolation.
Effect of demand-side factors on access to external finance by micro, small and medium manufacturing enterprises in Kumasi metropolis, Ghana
(2014-08-19) Frimpong, Siaw
The aim of this study was to analyze how demand-side factors affect access to external finance by micro, small and medium manufacturing enterprises (MSMMEs) in the Kumasi Metropolis, Ghana. The demand-side factors that were used in the study were firm characteristics (age, size, legal form and asset tangibility), financial management practices (preparation and usage of financial information, business plan, capital budgeting and working capital management) and entrepreneur characteristics (age, gender, education and experience). The study was conducted among MSMMEs in the Kumasi Metropolis, in the Ashanti Region of Ghana. The target population of the study was 4400 MSMMEs. The sample size of the study was 440 MSMMEs made up of 248 micro firms, 137 small firms and 55 medium enterprises. This study employed explanatory survey design utilizing quantitative methods in data collection and analysis. Data was analyzed using descriptive statistics such as means and frequency distribution. Pearson‘s correlation was used to test the relationship between firm characteristics and financial structure. Logistic regression was also used to test the relationship between demand-side factors and access to external finance. Logistic regression was used because of the dichotomous nature of the dependent variable, as firms are grouped as having access or no access to external finance. The results of the study show that there is a positive relationship between financial structure and firm characteristics (age, size, legal form and asset tangibility). The study found that some of the demand-side factors analyzed impacted significantly on access to external finance. These include size of the firm, educational background and work experience of the entrepreneur and financial management practices such as preparation and use of financial information, business plan and capital budgeting. It is recommended that firms should incorporate good financial management practices such as preparation and usage of financial information in their operations. It is also important for entrepreneurs to incorporate business plans in their operations as this impact positively on access to external finance. Education and experience of the entrepreneur were found to significantly impact on access to external finance. There is therefore the need to design short courses in the area of financial management practices for entrepreneurs, particularly those with lower educational background as education is an important factor in accessing external finance. Size of the firm was also found to be a significant factor affecting access to external finance and therefore small firms should come together to form bigger firms in order to attract external finance. Ghana government should be directly involved to help eliminate the financing gap faced by MSMMEs through direct government interventions through public banks, credit guarantee schemes and other forms of subsidized financing. The procedures involved in seeking external finance should be simplified to encourage more MSMMEs to seek external finance. Banks and other financial providers should have a department solely devoted to the financing needs of MSMMEs and develop products purposely for MSMMEs.
Determinants of Acquisition of Financial Services by Micro and Small Enterprises in Langata Sub-County of Nairobi County, Kenya
(Kenyatta University, 2015) Ndede, Fredrick W. S.
Globally Micro and Small Enterprises have been acknowledged as agents of economic development. They have been cited as being the seedbed to the medium and large enterprises. MSEs have been known for their crucial role in creation of employment, income generation and supplementing the provision for goods and services by large enterprises as well as eradication of poverty. The contribution of MSEs in the creation of wealth and support to the development and growth of medium and large scale enterprises has been enormous. In recognition of their contribution to development, several governmental and non-governmental agencies have been set up to support their activities. The failures of MSEs to recognize the important role played by external sources of finance usually pose a serious challenge to their functions. Since MSEs regularly suffer serious financial constraints, they are yet to realize their full potential as agents of economic growth. In Kenya for example, the failure rate of MSEs is still as high as 65 percent. The general objective of this study was to investigate the determinants of acquisition of financial services by MSEs in Langata Sub County of Nairobi County in Kenya. The specific objectives of the were to determine the relationship between legal and regulatory framework, level of education and entrepreneurial training, demographic factors as well as economic factors and acquisition of financial services by MSEs in Langata Sub County. The study design was descriptive with a target population consisting of 2,098 micro and small enterprises. A sample size of 250 businesses was determined through stratified random sampling technique by sector. Primary data on the selected businesses were collected using semi-structured questionnaires. The response rate was 231 firms representing 92.4 percent. Data was analysed using frequency distribution, chi-square tests, correlation analysis and multinomial regression analysis. The study found that there was a negative but significant relationship between legal and regulatory framework, level of education and entrepreneurial training and acquisition of financial services by MSEs. Demographic factors also had a negative but significant relationship with acquisition of financial services by MSEs in Langata. For practice the study recommended that: firstly, accessibility to financial services can be enhanced by financial intermediaries and the government by working on a framework that relaxes the complexities in loans acquisitions. Secondly the government should enhance entrepreneurship financial training, including cascading it through formal education system and thirdly, financial services providers should develop financial products that are inclusive enough to carter for the different demographic groups.
Loan Repayment and Sustainability of Government Revolving Funds in Murang’a County, Kenya
(Kenyatta University, 2015) Mungai, J. N.
In the attempt to alleviate poverty and empower the deprived, many non-governmental organizations and Government line agencies have been providing revolving funds and social services to rural dwellers in Kenya. The role of these funds is to help the rural poor, to earn a decent living, through their on-going income-generating activities. The government of Kenya overtime has formulated a series of revolving funds to counter the problem. The most notable and current, is the Youth Enterprise Development Fund and the Women Enterprise Fund which were both conceived in 2006 and 2007 respectively. In these programmes, identifying the marginal borrower has not been a simple case owing to the complex interplay of costs, returns, and risks in credit markets. The role of the government in providing start-up funds and their relationship to sustainability is crucial. The main focus of this study was to analyze the loan repayment and sustainability issues of government revolving funds in Murang’a County. The study was guided by the following specific objectives; to analyse the effect of loan repayment and sustainability of government revolving funds; to examine the implication of socio-economic functions of groups to government revolving funds sustainability; to establish the effect of borrower characteristics to government revolving funds sustainability and to determine the effect of technology on government revolving funds sustainability in Murang’a County. The study adopted a positivism philosophy of research, where the researcher was independent on what was being observed and studied. Descriptive survey design was used to determine the level of government revolving fund repayment and its effect on sustainability for other borrowers. The target population was 1520 social and economic groups in Murang’a County. Clustering and Simple Random Sampling techniques were applied to select a sample size of 307 groups, in addition a census of 16 constituency credit officers, who were also interviewed. This, in total accounted to 19.5% of the total population. A questionnaire and an interview schedule were used to collect data. Descriptive data were analysed using tables and charts. Quantitative data were analysed using Chi-square, Analysis of Variance and Logit Regression Model. The results indicated that government revolving funds operation procedure, socio-micro group functions and borrowers’ characteristics were statistically significance to loan repayment and sustainability. The influence on technology to government revolving fund was statistically non-significant to repayment and sustainability. The study recommended training of young individuals on how to run businesses at the earliest time possible for them to appreciate owning and running own businesses. The review of the education curriculum to reverse the teaching business studies in primary schools was recommended. The study conclude that the WEF and the YEDF need to be institutionalized to increase the overall amount and efficacy in projects launched by the groups and individual beneficiaries; that there is a dire need to reduce external reliance by weaning the WEF and YEDF away from dependence of external sources including the government and that; though technology did not have a statistical relationship to loan repayment and sustainability in Murang’a County, the government should strengthen this facility to enable loanee follow-up and enhance early detection of defauters in order to take early action
Effects of Tax Reforms on Compliance of Small and Medium Enterprises in Kenya; Case of Kisumu Town
(Kenyatta University, 2015) Ondimu, O. M.
With increased expenditure there is demand for more tax revenue calling for revenue Enhancement measures. In Kenya the SMEs are non-compliant despite having huge tax Revenue potentials. From mid 1980s the government initiated tax reforms to enhance Compliance by widening tax bases and improve tax administration. Consequently Government reorganized KRA, changed personal relief (by 10%), granted amnesty on non-compliant taxpayers with arrears (up to 11 June 2004) and turnover tax at 3% (from 1 January 2008). However, SMEs sector are characterized with low compliance levels. It Was important establish effects of tax reforms on tax compliance of SMEs in Kenya with use of Kisumu Town. Specifically the study sought to determine effects of turnover tax on compliance of SMEs determine effects the KRA tax administration reforms on SMEs compliance and establish behaviors of SMEs in Kisumu Town which affect tax compliance. The study adopted descriptor-exploratory research design with each Kisumu KRA officer and business constituted one sample unit and respondents. Samples of 275 (involving 219SMEs and 56 KRA officers) were selected from target population of 505 SMEs and 56 Kisumu KRA officers using stratified simple random sampling approach and census for KRA officers. The study used both primary (from questionnaires) and secondary data. These instruments were administered by the researcher with help of research assistants. Data collected were analyzed using both descriptive statistics (frequencies, percentages and means) and inferential statistics (Pearson’s Moment of correlation, regression); using SPSS. The findings revealed that turnover tax system affects and accounts for 28.8% [r (214) =439, p<0.01] SMEs’ tax. KRA administrative reforms affects and accounts 36.8% SMEs tax compliance [r (214) = 617, p<0.01].KRA was effective (mean ratting of 3.869) butt ineffective in facilitating SMEs to voluntarily comply. KRA was effective in providing taxpayers information and guidance. KRA was Effective in use of technology and in data warehousing. There is a fair rating of reducing compliance burden of the SMEs (mean responses being 3.562). SMEs tax behaviors negatively affects tax compliance [r (214) =-542, p<0]. There was negative influence from the referent groups and SMEs (68%; 146) do not use tax agents. The turnover productivity for the last six year has been increasing from the time of start of tax reforms targeting SMEs in Kenya. This is based on the efficiency ratio of 0.35 percent in the year 2008 which has increased to the current 0.4. From the findings, the study concludes that the tax reforms and tax behaviors significantly affect tax compliance of the SMEs in Kisumu Town. The study recommends that continuous emphasis on creation of awareness and monitoring of the compliance of the SMEs. Review the tax laws and more enforcement of the SMEs tax laws. KRA should carry out more profiling of the SMEs and research more on the SMEs to understand the SMEs. Publicize prosecution non-compliance; provide incentives for compliance and opportunity to voluntarily disclose before the application of penalties. There is need for the government to enhance SMEs’ Trust with the tax reforms for voluntary compliance.
Financial Flexibility and Corporate Investment among Non Financial Companies Listed On Nse, Kenya
(Kenyatta University, 2015-12) Koori, Maimba Jeremiah
The existing evidence indicates that listed companies on the Nairobi Securities Exchange Kenya are financially flexible. However, these firms have not managed to undertake corporate investments of the magnitude achieved by other countries where firms are financially flexible. Previous studies have shown that financial slack, spare debt capacity and dividend decisions directed at maintaining financial flexibility in corporate entities can enhance investment ability of the firms. This disparity therefore motivated this study which sought to link the measures of financial flexibility and corporate investment in the Kenyan context between 2002 and 2013. This study therefore sought to establish the effects of debt capacity, cash holdings, and dividend decisions on corporate investments. The study further sought to establish the moderating effects of ownership concentration on the relationship between financial flexibility and corporate investment. The pecking order theory underpins this thesis since the management of companies have to make investment decisions based on the financial resources available both from internal and external sources with a view of maximizing the wealth of the shareholders. The respective variable indicators were used to determine the effects. Explanatory and non experimental research design was used to fulfill the research objectives. All 28 non financial companies listed on the NSE and fulfilled the set conditions in the period under the study were considered. Secondary panel data collected was sourced from annual financial reports of quoted companies and records maintained at Nairobi Securities Exchange. The study applied panel data model (fixed effects) based on the outcome of Hausman specification tests to determine the effects of financial flexibility on investment decisions of non financial listed companies on NSE, Kenya. Feasible generalized Least Square regression results revealed that leverage and asset tangibility being indicators of debt capacity had a positive association with investment decisions. Free cash flow, an indicator of cash holdings, had positive relationship with investment decisions whereas; profitability an indicator of dividend decisions had positive relationship with investment decisions. The study also found out that the moderating effects of ownership concentration on the relationship between financial flexibility and investment decisions had no effect. The study recommends that managers of listed non-financial companies should maintain accumulating reserves of borrowing power that allows them to have a better access to the capital market when faced with positive shocks to their investment opportunity. The study also recommends that managers of non financial listed companies should increase free cash flow as it has been established that investment ability of these companies rely heavily on it. Having established that free cash flow increases the ability to invest, there is need to carry out further study in order to establish whether the investments undertaken are value adding or whether they are just an expression of empire building.
Government Expenditure and Sectoral Economic Growth in Kenya
(Kenyatta University, 2017-05) Molonko, Brenda Nolari
Kenya is currently implementing the Second Medium Term Plan of Vision 2030. Growth objectives underpinning the Vision 2030 required the rate of growth of the economy to have risen from 6.1% achieved in the year 2006 to 10% in the year 2012. However, the economy recorded only 4.5% and 5.7% growth in the year 2012 and the year 2013 respectively. Even so, the government has continually spent substantial amounts of money annually to finance key Sectors in implementing Vision 2030 flagship projects, with the effect of this being fluctuations and inundations in Sectoral economic growth. Noteworthy, several studies have been carried out in Kenya to explain discrepancy between government expenditure and economic growth, but study findings have showed conflicting outcomes. Besides that, these studies have not integrated inflation, corruption and political risk that from literature have been seen as critical moderators of the relationship between government expenditure and Sectoral economic growth. This study, therefore, sought to bridge this gap by determining the effect of government expenditure on Sectoral economic growth with corruption, inflation and political risk moderating the hypothesized relationship. The general objective of this study was to investigate the effect of government expenditure on Sectoral economic growth in Kenya whereas the study specifically sought to establish the effects of current expenditure, capital expenditure and debt servicing on Sectoral economic growth in Kenya as well as the moderating effect of inflation, corruption and political risk on the relationship between government expenditure and Sectoral economic growth. The study targeted 11 sectors that receive government expenditure and adopted positivist philosophy and a causal research design. Secondary data for the period 2006-2015 was collected from government debt servicing reports, Kenya National Bureau of Statistics Statistical Abstracts, Kenya National Audit Office reports, Transparency International reports and Political Risk Services Group reports, among others. The study conducted Hausman Test, Panel Stationarity Test and Heterogeneity Test and employed Autoregressive Distributed Lag model. The study found that current expenditure and debt servicing both have significant effect on Sectoral economic growth in the long run while capital expenditure has an instantaneous and long term effect. The study also found out that corruption, inflation and political risk have significant moderating effects on the relationship between government expenditure and Sectoral economic growth in the long run. The study recommends rationalization of current expenditure and the same is transferred to capital expenditure which is growth enhancing. If the government must borrow, the loans should be concessional in nature with long term repayment periods. Additionally, the government should reduce the levels of corruption to accelerate growth through thorough scrutiny of government expenditures and proper control measures be meted. Further, the government should ensure that reasonable levels of inflation are achieved, political stability enhanced and good governance promoted to accelerate economic growth. The study finally suggests areas of future research to capture government expenditure components for county governments to further test the effect of government expenditure on Sectoral economic growth in Kenya.
Short-term financing decisions and financial performance of non-financial firms listed at the Nairobi Securities Exchange, Kenya
(Kenyatta University, 2017-05) Makori, Mogaka Daniel
The existing literature links poor financial performance among non-financial listed firms in Kenya to long-term funding conduct of these firms. However, as important as longterm financing decisions are, they are made less frequently, while the day-to-day decisions involving the management of short-term financing components consume tremendous amounts of management time. Poor short-term financing decisions impair the firm’s ability to remain operating. This study therefore investigates the effect of shortterm financing decisions on financial performance of non-financial firms listed at the Nairobi Securities Exchange, Kenya. This thesis also seeks to determine the interaction effect of short-term financing on the financial performance of non-financial firms listed at the NSE. The study further investigates the moderating effect of firm characteristics namely firm size, growth opportunities and financial leverage on the relationship between short-term financial decisions and financial performance of non-financial firms listed at the NSE. In order to provide a holistic solution, the study evaluates the mediating role of cash holdings on the relationship between short-term financing decisions and financial performance of non-financial firms listed at the NSE. The research employs explanatory research design, which is non-experimental in nature. The study has adopted a census of 26 non-financial firms listed at the NSE. The study uses panel data extracted from the annual reports and financial statements of non-financial firms obtained from the NSE handbooks, Capital Markets Authority library, and company websites for the period 2001-2014. The study has applied panel data models (random and fixed effects) on the basis on the results the of Hausman specification test. The mediating effect of cash holdings has been tested using the step-wise regression technique by employing a fourstep approach by Baron and Kenny (1986). In addition, the study has used Modified Wald and Wooldridge tests to test for heteroscedasticity and serial correlation respectively. Moreover, the study has performed Bera and Jarque and Fisher-type tests to test for normality and unit root in panel data respectively while the study has tested the presence of multicollinearity by the Variance Inflation Factor test. Finally, the study has used Feasible Generalized Least Squares to approximate the regression model owing to the presence of heteroskedasticity problem. The FGLS regression results reveal that inventory turnover decisions have positive effect on financial performance measures. However, only the relationship between inventory turnover decisions and return on assets is significant. The study also establishes that accounts receivable turnover decisions are have significant negative effect on all financial performance measures while accounts payable turnover decisions have significant positive effect on all financial performance measures. The study further determines that cash holding has significant mediating effect on the relationship between short-term financing decisions and financial performance of non-financial firms listed at the NSE. Additionally, the study finds that the interaction between the short-term financing decision components had a significant effect on financial performance. Finally, the study determined that the relationship between shortterm financing decisions and financial performance when using return on assets and Tobin-Q is moderated by firm characteristics. The study, therefore, recommends that managers of non-financial listed firms at NSE should lessen the accounts receivable period to a sensible minimum in order to generate worth for their shareholders; and increasing inventory holding and accounts receivable periods to reasonable levels. This study further recommends that managers should maintain an optimal cash ratio. Finally, the study recommends that the policy makers of should consider the firm characteristics such as the size of the firm, leverage and growth opportunities affect short-term financing decisions which in turn affects firms’ performance.
Value chain financing and financial performance of edible oil manufacturing companies in Kenya
(Kenyatta University, 2018) Agarwal, Rajiv
Edible oil manufacturing companies in Kenya were making profits but not optimal profits. There was no shortage of market demand for the commodity in Kenya and East Africa in general. However, the industry is affected by low production of raw materials in the country and inadequate financing by members in the value chain besides lack of clear initiative and knowledge in developing the value chain. It was therefore necessary to estimate the internal and external financing and investment needs in the development of value chain for the sector. The general objective of this research was to determine the effects of financing by members in the value chain on the financial performance of the edible oil manufacturing companies in Kenya, while the specific objectives were to establish the effects of financing in raw material and operation, financing in working capital arrangement, primary activities and supporting activities together with establishing the effects of moderating variable, firm characteristics such as firm size and capital structure, on the financial performance of these companies. The study used descriptive retrospective panel data and philosophy was positivism where all manufacturing companies in the edible oil sector in Kenya were included making it a census study. The secondary data was extracted from financial statements of edible oil manufacturing companies for the period 2008 to 2014 and primary data by using the interview guide administered to the company executives. Using Principal Component Analysis, composite index of dependent variable (financial performance) was computed representing 3 components for further analysis in the study. Descriptive analysis, correlation and panel regression analysis were used to investigate the relationship and association of variables in value chain financing. The results of this study have provided an improved understanding of the value chain financing and how improved and appropriate financing affects the financial performance of edible oil sector in Kenya. The major findings and conclusions of this study show that, financing in primary activities through inbound logistic, had negative statistical effect on financial performance of companies (Beta value -4.56, P-Value 0.04). Support activities through procurement cost had positive statistical effect on financial performance of companies (P-Value 0.00001, Beta value 6.09). The moderating variable firm characteristics measured through Firm Size had positive statistical effect on financial performance of companies (P-Value 0.0001, Beta value 2.14). Financing through raw material and working capital did not have statistical effect on the financial performance. The study provided statistical model for determining the appropriate finance mix in primary activities, supporting activities and working capital to utilize the optimum capacity for edible oil manufacturing companies in Kenya. Study also suggested that additional financing in value chain affects the financial performance and therefore should be from long term sources of finance. Result of the study will help in understanding and developing the value chain. The study will also help policy makers for preparing guidelines for financial institutions for financing of value chain. The study results form the basis for future research in the area of value chain financing in other manufacturing sectors and can be used by the management of the companies to develop strategies for financing mix in their companies based on the model developed by the study for predicting the financial performance.
Effect of bank size and financial risk exposure on financial performance of commercial banks in Kenya
(Kenyatta University, 2018-03) Konya, Nelly M.
The study sought to establish the effect of bank size and financial risk exposure on financial performance of commercial banks in Kenya. The specific objectives of the study were: to determine the effect of bank size on financial performance of commercial banks in Kenya; to establish the effect of financial risk exposure on financial performance of commercial banks in Kenya; to determine the moderating effect of macroeconomic variable on bank size and financial performance of Commercial Banks in Kenya; and to determine the moderating effect of macroeconomic variable on financial risk exposure and financial performance of Commercial Banks in Kenya. Studies on bank size and financial risk exposure have presented mixed results and they have not been conclusive on how they affect financial performance. Despite the empirical evidence cited demonstrating that it is possible to conduct a meaningful analysis of financial performance, the major conclusion is that most models focus on a single variable instead of a set of variables. The study factored in bank size and financial risk exposure variables and it was done in the Kenyan context so as to determine the effect of bank size and financial risk exposure on financial performance of banks in Kenya. The descriptive research design and a positivist approach were adopted. The Berger and Hannan approach was used establish the relationship between bank size, financial risk exposure and the moderating effect of macroeconomic variable on the financial performance of commercial banks in Kenya. All the 43 commercial banks were used during the study. Secondary data was obtained from Kenya Bankers Association and Central Bank of Kenya’s comprehensive archive of financial data for the 43 commercial banks for the period 2009 to 2015. Various diagnostic tests were carried out to and the study data structure was panel hence Stata was employed to determine the relationship between the variables. Under financial performance, average return on assets in Kenya is consistent with average return on assets in Sub-Saharan Africa implying that Commercial Banks’ return on assets in Kenya is about average of Sub-Saharan Africa. The results indicate that bank size plays a major role in impacting on the financial performance of commercial banks in Kenya. The results also imply that the main source of financial performance in the Kenyan banking industry is as a result of structure or collusive power. Under financial risk exposure, market risk has minimal effect on financial performance of commercial banks in Kenya. This means that the overall market movement in the financial market has minimal impact on the financial performance in the banking industry. The Kenya GDP growth rate shows a minimal effect on the relationship between bank size and financial risk exposure on the financial performance of commercial banks in Kenya. In conclusion, banks need to grow bank sizes where they enjoy both economies of scale and scope. Treasury should design policies that will increase the capital size, liquidity requirements and deposit insurance premiums; this may assist in enlarging the size of banks to a level where they are fairly equal with none having relative market power to drive the market. Areas of further research may include and not limited to considering other variables besides the financial risk exposure and bank size in determining their effect on the financial performance of commercial banks in Kenya. The research may as well be done in the East African or African context. The further studies should seek to leverage on mixed research approaches that utilize both quantitative and qualitative research.
Exchange rate volatility and stock prices of companies listed on Nairobi securities exchange, Kenya
(Kenyatta University, 2018-05) Onyango, Austin O.
Kenya has experienced continuous exchange rate volatility since October 1993 when the fixed exchange rate regime was abolished and floatation of the Kenya shilling was introduced. The continuous volatility of exchange rate brings about increase in foreign exchange risk exposure which in turn leads to increase in transaction costs of companies. Higher transaction costs lower the expected earnings of companies which subsequently affect the market price of stocks hence, the value of companies and the investors’ wealth. Stock prices represent returns which investors expect from a given security. Hence, variables that cause stock prices to change are of importance to investors and the economy at large. Changes in stock prices and the trend of changes have always been of interest in the capital market given their effect on the stock market stability and strategies adopted by investors. The stock market plays a vital role of intermediation between borrowers and lenders hence uncertainty in the market impacts negatively to the economy. For the period 2007 to 2014, Kenya experienced high exchange rate volatilities which affected the performance of the Nairobi Securities Exchange. Stock market performance is key in determining if investors’ portfolio of stocks will bring adequate returns based on their expectations. Therefore, variables that influence the performance of the stock market are important to investors, stockbrokers, and the regulatory authorities. This study examined the interaction between foreign exchange market and the stock market in Kenya, with the aim of identifying the effect exchange rate volatility on stock prices of companies listed in Nairobi Securities Exchange. Further, the study sought to establish the moderating effect of selected monetary policy variables on the relationship between exchange rate volatility and stock price movement in Kenya. The study employed an explanatory non-experimental research design. A census of 61 companies listed in the Nairobi Securities Exchange, was taken. The study utilized monthly data for the period of 96 months from January 2007 to December 2014. Pairwise Granger causality test revealed that causality runs from exchange rate volatility to stock prices. Regression analysis results revealed the existence of statistically significant negative relationship between daily mean exchange rate, monthly mean exchange rate, and combined drivers of exchange rate volatility on stock prices of companies listed in Nairobi Securities Exchange. However, regression results revealed that inflation rate had insignificant negative relationship with stock prices. The moderating monetary policy variables were tested using the stepwise multiple regressions. Stepwise regression results revealed that there is significant moderating relationship between combined drivers of exchange rate volatility and stock prices of companies listed in the NSE. Therefore, monetary policy variables have a moderating effect on the relationship between drivers of exchange rate volatility and stock prices in Kenya. The study recommends that Capital Markets Authority should fast-track the establishment of Derivatives Exchange Market in Kenya. The derivative instruments help economic agents to improve their management of both market and credit risks hence increasing the market resilience to shocks. The establishment of derivatives market will further boost attraction of both domestic and foreign participation at the Nairobi Securities Exchange thereby benefiting all sectors of the economy. The study further recommends that portfolio managers should continually analyse the behaviour of foreign exchange market with a view to disposing of stocks in their holdings if they predict increased exchange rate volatility. Otherwise, portfolio managers should increase their holdings when they predict a decrease in exchange rate volatility. Most importantly, both regulatory bodies and corporate managers should make strategic decisions in consideration of all identified variables since these variables are not in isolation.
Financial deepening and capital market development in Kenya
(2018-07) Munene, Agnes Wanja
The Kenya development plan 2007 projected an annual economic growth rate of ten percent for the next twenty five years. To achieve this objective, the capital market was identified as a critical avenue that could be used to mobilize investment funds required for implementation of vision 2030 projects. The government therefore has been implementing financial deepening strategies aimed at quickening the pace, development and contribution of the capital market. However, despite the well-intended and recurring government interventions, the capital market is still narrow, shallow and thin. This is evidenced by a slow growth in number of listed companies at NSE over the years and limited long term financial instruments such as bonds, derivatives, global depository receipts and exchange traded funds. This study therefore, examined the effect of financial deepening on capital market development in Kenya. Specific study objectives were to determine the influence of financial depth, market liquidity, financial openness, and financial access on capital market development in Kenya. The philosophy that was used in this study was positivism paradigm. The study used explanatory and non- experimental research design. The study utilized secondary time series data extracted from Capital Market Authority, Kenya National Bureau of Statistics and the Central bank of Kenya annual reports for the period 1990-2015. Based on the outcome of unit root test, time series data model (ARDL-ECM) was used in the study to define both short and long run financial deepening effects on capital market development in Kenya. Data analysis was aided by use of EViews 9.0 version. The mediating effect of gross domestic savings was tested using Baron and Kenney stepwise regression. In addition, Bauer and Curran product term was used to determine the interaction between variables. Further, since there was co integration among variables, Granger Test was carried out to establish the direction of the causal link between financial deepening and capital market development in Kenya. The ARDL-ECM coefficients revealed that financial depth and market liquidity has positive significant bearing on capital market development. Consequently, financial deepening as measured by financial access and openness has adverse but significant influence on development of capital market in Kenya. The mediation results revealed that gross domestic savings does not mediate the link between financial deepening and development of the capital. The researcher found a positive significant interaction between financial deepening and the market development. The study recommends the Central Bank in Kenya should use expansionary monetary policies as this increases money supply in the economy hence inducing capital market development. Consequently, the CMA should provide a more enabling trading environment that will enhance the speed and ease of buying and selling securities at the NSE thus increasing market liquidity. Further, the CMA should enhance access to the market by increasing more platforms for trading and also create more investor awareness on capital market product so as to increase their uptake
Bank Characteristics, Macroeconomic Variables and Lending Rates Among Commercial Banks In Kenya
(Kenyatta University, 2018-10) Mokaya, Maubi Andrew
The banking system is considered a key component in provision of funds for economic development through financing capital accumulation, technological innovations, productivity growth and enhancing other sustainable economic growth rates and consumption. Pricing of funds through lending rates and efficient banking systems are essential for acceleration of economic growth. This would spur economic growth and enhance the financial sector development. Lending rates in Kenya have been high for a long time and various efforts have been made to arrest the situation over time notably: Introduction of the KBRR by the CBK, attempts to cap lending rates in 2010 by the Kenya National Assembly and finally the enactment of the banking amendment Act of 2016. However, the lending rates still remain high despite capping. Research done on effect of various variables on lending rates has assumed direct relationship and has produced mixed results. This study sought to investigate the effect of bank characteristics and macroeconomic variables on lending rates among commercial banks in Kenya. Specifically the study sought to: establish the effect of bank size, credit risk, and liquidity risk, operating costs, Gross Domestic Product growth rate and inflation rate on lending rates among commercial banks in Kenya. The study further sought to establish the moderating effect of political risk on the relationship between bank characteristics and lending rates among commercial banks in Kenya and to determine the moderation effect of political risk on the relationship between macroeconomic variables and lending rates among commercial banks in Kenya. The research philosophy for this research was positivism. Explanatory non-experimental research design was employed. The target population was thirty nine (39) commercial banks from whom secondary data was collected by way of census since these are the banks from which complete information could be obtained for meaningful analysis for the study period 2006-2015. Descriptive Statistics including Mean and Standard deviation and inferential statistics: Panel regression analysis and Correlation analysis were carried out. Data analysis was run on the Stata 13 package and findings presented in figures, tables, graphs and charts while deriving conclusions and recommendations from the findings of the study. The study found that operating costs, credit risk and inflation had positive effects and were significant determinants of lending rates. However the effect of GDP growth rate and bank size was found to be negative and significant. Political risk was found to have insignificant moderating effect on the relationship between bank characteristics, macroeconomic variables and lending rates among commercial banks in Kenya. Based on the findings, the study concluded that bank size, credit risk, operating costs, GDP and inflation play a significant role in determining the lending rates of commercial banks. The study recommends that government pays attention to macroeconomic variables while controlling the domestic lending rates. The study further recommends that policy initiatives that will help to keep the lending rates at a low level take into consideration the need to enhance economic growth and reduce inflation. The study recommends in conclusion that commercial banks that wish to adjust their lending rates focus on their internal factors such as bank size, credit risk and their operational cost and that the government considers deregulation on lending.
Financial Structure and Financial Performance of Selected Firms Listed at Nairobi Securities Exchange, Kenya
(Kenyatta University, 2019) Gathara, Mwangi Zachary
A high number of quoted firms have registered declining financial performance in the recent years resulting to financial difficulties contrary to stakeholders’ expectations and adversely affecting the economic growth of the Kenyan economy. Financial structure choice and its impact on financial performance remains a great dilemma to all stakeholders. This study investigated the effect of financial structure on financial performance of selected firms listed at Nairobi Securities Exchange, Kenya. Specifically, the study investigated the effect of leverage, liquidity and equity on financial performance. In addition, the study evaluated the moderating effect of firm size on the relationship between financial structure and financial performance of selected firms listed at NSE, Kenya. The study adopted positivist philosophy as it focused on objectivity and fits a quantitative study with the objective of testing hypotheses. Explanatory research design was employed in this study due to the nature of the problem and available quantitative data. Multivariate tests using panel data model examined the effects of independent variables on firm’s financial performance. The target population of the study comprised of all 30 firms listed on the NSE, between years 2007 to 2015 drawn from seven selected sectors of the economy which met the selection criteria. A census of the 30 firms was done and data collected for the 30 companies for the period 2007 - 2015. The study utilised secondary panel data contained in the annual reports and financial statements of selected companies. Various diagnostic tests including Auto-correlation test, Normality test, Heteroscedasticity test, Unit root test and Test for pooling were carried out. Breach-Pagan Lagrange multiplier (LM) test was used showing that there were no panel effects (implying that ordinary least square should be used (pooling). Therefore, the data was pooled. The study used descriptive statistics, correlation analysis and panel linear multiple regression analysis. Regression coefficients were used to test for significance using t-statistic at 5% level of significance and conclusions drawn. The coefficient of determination (R2) was used to rank explanatory variables’ contribution to the response variable. The study found that Leverage, Liquidity and Owners Equity had significant positive effect on financial performance of selected companies listed at NSE, Kenya, while firm size had positive and significant moderating effect on the relationship between financial structure and financial performance. The overall moderating effect of firm size on the relationship between financial structure and financial performance increased by 7.7% after incorporating the moderator which explained 91.6% of changes in financial performance compared with 83.9% without the moderator. The study concluded that leverage, liquidity and owners’ equity had positive and significant effect on financial performance and that the use of various components of financial structure jointly enhanced the financial structure’s power to explain the variations in financial performance. The study contributed to the financial structure literature by providing evidence of the effect of Leverage, Owners’ Equity and Liquidity on financial performance of firms listed in NSE, Kenya for the period 2007-2015. The study recommended that managers of the selected firms listed at NSE, Kenya could utilize the various sources of finance since financial structure has a positive effect on the financial performance of the listed firms with leverage making the highest contribution to financial performance.
Effects of Entrepreneurial and Firm Characteristics on Access to Venture Capital by Small and Medium Enterprises in Nairobi City County, Kenya
(Kenyatta University, 2019) Muchira, Bancy Wawira
Small and medium Enterprises are vital for economic growth especially in the developing countries. However, empirical evidence shows that most of these enterprises fail due to poor/lack of access to finance. Access to venture capital by the small and medium enterprises could be a plausible alternative but unfortunately research has pointed out that majority of the enterprises do not access venture capital financing, which is considered an important option for small and medium enterprises trying to grow. This study therefore sought to investigate the effect of entrepreneurial and firm characteristics on access to venture capital by small and medium enterprises in Kenya. The study was guided by the following specific objectives; To determine the effect of entrepreneur‟s innovativeness on access to venture capital, to establish the effect of entrepreneur‟s managerial competency on access to venture capital, to determine the effect of firm‟s age on access to venture capital, to establish the effect of firm‟s sector of operation on access to venture capital, to determine the mediating effect of firms performance on the relationship between entrepreneurial and firm characteristic and access to venture capital and lastly to determine the moderating effect of risk reduction strategies on the relationship between entrepreneurial and firm characteristics on access to venture capital by Small and medium size enterprises in Kenya. Agency theory underpinned the study. The study adopted the explanatory non experimental research design and positivism philosophy guided the study. Target population of the study was 334 Small and medium size enterprises ranked by KPMG between 2008 and 2017 in their annual survey. Proportionate random sampling technique was used to select the firms. Primary data was collected by semi structured questionnaire, using drop and pick method. Both descriptive statistics and inferential statistics were used to analyze the data. Nested multinomial logit model was used to establish the effect of entrepreneurial and firm characteristic on access to venture capital financing. The results reveal that; the influence of an entrepreneur‟s innovativeness on access to venture capital financing is statistically significant. Secondly, managerial competency had positive influence and was statistically significant to access to venture capital financing among SMEs. Third, the results show that SMEs in the service industry benefits more from venture capital as opposed to those in the non-service industry. Fourthly, the results show that a firm‟s age has a positive though statistically insignificant influence on access to venture capital financing. Fifth, there is no mediating relationship between a firm‟s performance on the relationship between entrepreneurial and firm characteristic and access to venture capital financing. Finally, there exists a moderating relationship between entrepreneurial and firm characteristic on access to venture capital financing. From the findings, a number of recommendations can be made. First, SMEs should continue investing in enhancing entrepreneurial innovativeness as it increases the propensity of their enterprises from accessing venture capital financing. Secondly, given that managerial competency positively affects SMEs access of venture capital financing, firms should invest in human capital of their management through various strategies. For instance, investing in training gives employees the opportunity to develop new skills and accumulate the knowledge they need in order to achieve specific organizational and personal goals with the priority being to train managers so that they can be able to cope with the challenges which hinder business success.
Financial Soundness and Efficiency of Deposit Taking Savings and Credit Cooperative Societies in Kenya
(Kenyatta University, 2019-05) Kimutai, Carolyne Jebiwott
The deposits taking Savings and Credit Cooperative Societies (DTS) have continued to play a critical role in Kenya’s financial sector in terms of access, savings mobilization and wealth creation. According to the Kenya’s economic blueprint Vision 2030, is a key player to achieving the 10% annual economic growth target. Given the importance of the sector in economic growth, there has been considerable interest in their efficiency. In Kenya, DTS have been reported to have low efficiency, with the average efficiency being less than one against a general expectation of an efficiency level of one. There is limited empirical literature to explain the inefficiency of DTS in Kenya. In view of this, the study sought to establish the effect of financial soundness on efficiency. The specific objectives of the study were: to determine the effect of asset quality, capital adequacy, liquidity and earnings rating on efficiency of DTS. The study further sought to establish the moderating effect of size of DTS on the relationship between financial soundness and efficiency. The study was anchored on Buffer Capital Theory, Economic Efficiency Theory, Asymmetric Information Theory, Modern Portfolio Theory and Shiftability Theory of Liquidity. The study adopted positivist philosophy and explanatory research design. The target population comprised 110 DTS as per SASRA report for the year 2017.The study used secondary data that was collected from the audited financial statements for the period 2012-2016.Data was collected using a document review guide. Data Envelopment Analysis methodology was used to generate efficiency scores. Both descriptive analysis which included mean and standard deviation and inferential statistics which included panel Tobit regression was done and was aided by s tata version 11 Tests conducted include: normality, heteroskedasticity, multicollinearity, autocorrelation, stationarity and model specification tests. Issues relating to the ethical conduct of research were upheld, ensuring that permission was sought from relevant authorities before collecting data. The study findings were as follows: DTS have not achieved efficiency however, the efficiency level on average has increased over the study period. Further, the descriptive analysis indicates that the mean of capital adequacy and liquidity is above the required minimum by the regulator. The mean of asset quality is above the required maximum by the regulator. In addition, the correlation analysis indicates that asset quality, earning rating and liquidity have a weak negative relationship with efficiency while capital adequacy has a weak positive relationship with efficiency. Lastly, asset quality, capital adequacy and liquidity had a statistically significant effect on efficiency while earning rating had an insignificant effect on efficiency. Size of DTS was found to have a statistically significant moderating effect on the relationship between financial soundness and efficiency. The study concluded that: DTS are inefficient; increase in asset quality improves efficiency; holding more liquid assets decreases efficiency; the more stringent DTS regulations on capital adequacy the more efficient they are. The study contributes to: Finance Theory, methodology, and empirical literature. The study recommends that: DTS should adopt more robust ICT platforms which facilitates members’ access the core services; DTS should develop credit administration strategies that reduce the amount of non-performing loans; a merger policy for the DTS should be developed so as to encourage the smallest DTS to merge in order to increase their economies of scale hence resulting to improved efficiency. Limitations highlighted include: lack of enough empirical evidence in Kenya; lack of uniform classification of accounting items.
Financing Decisions and Shareholder Value Creationof Non- Financial Firms Quoted at the Nairobi Securities Exchange, Kenya
(Kenyatta University, 2019-06) Kariuki, G Muthoni
Shareholder value creation and profit maximizing are among the primary objectives of a firm. Shareholder value creation focuses more on long term sustainability of returns and not just profitability. Rational investors expect good long term yield of their investment. Corporate financial decisions play an imperative role in general performance of a company and shareholder value creation. There have been a number of firms facing financial crisis among them; Mumias Sugar Ltd, Uchumi Supermarkets Ltd and Kenya Airways Ltd. All these companies are quoted at the Nairobi Securities Exchange. Due to declining performance of these companies, share prices have been dropping and shareholders do not receive dividends. This study investigated the effects of financing decisions on shareholder value creation of non- financial firms quoted at NSE for the period 2008-2014. The study was guided by various finance models; which include, Modigliani and Miller, Pecking Order Theory, Agency Free Flow Theory, Market Timing Theory and Capital Asset Pricing Model. The study used general and empirical models from previous studies as a basis for studying specific models which were modified to suit the current study. The study was guided by the positivism philosophy. The study employed explanatory design which is non-experimental. Census design was used as the number of non- financial firms at the time of the study was 40 companies. The data was gathered from NSE handbooks and CMA publications comprising of annual financial statements, income statements and accompanying notes. Ordinary Least Square regression analysis was conducted to examine the effect of various financing decision variables on shareholder value creation. Step wise regression technique was used to test for moderating effect of Gross Domestic Product growth rate. The results revealed that equity financing, debt financing, working capital financing and dividend financing had a statistically significant positive effect on EVA. The study further analyzed sector based differences among companies listed at the NSE. The results indicated significant differences among various sectors in respect to the effects of financing decisions on shareholder value creation. The study found that, the moderating effect between financing decisions on shareholder value creation and GDP growth rate had a positive and statistically significant effect. Feasible generalized least squares were used to estimate the model. Diagnostic tests were conducted to ensure non-violation of the assumptions of Classical Linear Regression Model. Among the tests conducted; includes panel unit root test, Autocorrelation, Homoskedasticity and Multicollinearity tests. Study model tests showed that, there was non-violation the assumptions and hence the model found fit for further analysis. The study recommends that managers of quoted non-financial companies should strive and practice periodic shareholder value creation analysis for continuous assessment of growth process. The government through the CMA should come up with regulatory framework that guide firm listed in enacted dividend policies. Further it is recommended that shareholder value creation report is enforced as an additional statement published by the firms quoted at the NSE, Kenya. Moreover, the government through Central Bank should employ fiscal and monetary policies aimed at reducing the cost of borrowing.
Systematic Risk and Performance of the Stock Market in Kenya
(Kenyatta University, 2019-06) Mutwiri, Nathan Mwenda
Stock prices in Kenya have been experiencing drastic volatility in the recent past. In the year 2015 alone, the value of the listed companies shrunk by about Ksh 250 billion representing about 25% of the national government annual budget. Performance of stock market is an important proxy of a country’s economic environment. Globally, economists, financial analysts and investors are interested in comprehending the factors that affect the fluctuations of stock markets. When the stock markets operate smoothly and efficiently, they facilitate economic growth and lower business risk. Excessive fluctuations of stock prices (in the financial markets) affects the smooth operation of financial markets and consequently adversely affects the performance of an economy. Rational investors are keen in achieving their maximum expected rate of return of their investments including stocks; they constantly value and revise their portfolio composition so as to maximise their wealth. An effectively diversified portfolio minimises the unsystematic risk hence almost eliminating these risk associated with an individual asset. However systematic risks cannot be managed by simple diversification. Investors therefore need to understand the effect of these systematic risks on the stock performance. The study sought to determine the relationship between systematic risk factors and performance of the stock market in Kenya. The specific objectives of the study were: to establish the relationship between Interest Rates, Foreign Exchange Rate, Inflation, Gross Domestic Product, Trading volumes and Performance of stock market in Kenya. The study adopted a positivist philosophy and employed a correlation research design. The study targeted all the stock listed in the Nairobi Securities exchange. This study utilized the NSE 20 share index movements to measure the performance of the stock market in Kenya. The study was underpinned by the Efficient Market Hypothesis, Capital Asset pricing Model, Arbitrage Pricing theory, Keynesian theory and Mixture Distribution model as theories and models anchoring the study. The study investigated the long run and the short run relationships between the systematic risks and performance of stock markets in Kenya using ten years (2007 to 2016). The study used time series secondary data from the Central Bank of Kenya, Kenya National Bureau of Statistics and the Nairobi Securities Exchange. The study used cointegration analysis to establish the relationships between the variables of study. In addition Johansen-Julius test of cointegration, Vector Error Correction Model and Granger causality test were used to test the relationships. The study found a significant long run positive relationship between interest rate, exchange rate, inflation, gross domestic product and performance of the stock market in Kenya. The study found a negative significant relationship between commercial bank weighted average lending rate, the trading volumes and the Performance of Nairobi Stock exchange. Growth in Gross Domestic Output was insignificant in explaining the performance of Nairobi stock exchange. In the short run, only three lags of commercial bank weighted lending rate, one lag of Inflation, and three lags of Trading volumes were significant in explaining changes in Nairobi stock exchange. This is an indication that C.B.K should not be keen to increase the CBR because this leads to a decline in stock prices and this discourages potential investors away which is disastrous for the economy. Additionally, the central bank should not be keen on having a target exchange rate for the USD/Ksh because changes in exchange cannot significantly explain the changes in stock price hence such a move would not be very effective. Investment firms, financial analyst should use past data on 91 Treasury bills rate, Inflation, Trading volumes to predict future performance of stock exchange for the benefit of investors.
Fundamental Risk Factors and Profitability of Commercial Banks in Nigeria
(Kenyatta University, 2020) Akims, Malgit Amos
Commercial banks undertake significant roles in the economic resource allocation of countries. The financial intermediation roles performed by banks are however largely dependent on profitability. The fluctuating profitability trend of commercial banks in Nigeria is bringing about high concerns among various stakeholders. The study sought to assess the effect fundamental risk factors on profitability of commercial banks in Nigeria. The specific objectives were to establish the effect of price level fluctuation, exchange rate fluctuation and interest rate fluctuation on profitability of commercial banks in Nigeria. The study further sought to assess the moderating effect of bank competitiveness on the relationship between fundamental risk factors and profitability of commercial banks in Nigeria. The study was anchored on Agency Theory, Deflation Theory, Expectations Theory of Exchange Rates, Liquidity Theory of Interest Rates, Market Power theory, Agency Theory and Financial Intermediation Theory. The study adopted positivism research philosophy and causal research design. The target population of the study comprised of the twenty one commercial banks in Nigeria with the sample comprising of the seventeen commercial banks which were fully operational within the study period. The study therefore was based on purposive sampling design. The study applied annual panel data for the period 2010 to 2017 which was sourced from the published audited financial statements of commercial banks and the Nigeria National Bureau of Statistics. Data was analyzed based on descriptive, correlation and panel regression analyses. Hypotheses of the study were tested at 0.05 significance level. Correlation analysis indicates that fundamental risk factors and bank competitiveness had significant correlation with profitability of commercial banks in Nigeria. Based on the panel regression analysis, the study found that price level fluctuation had a significant effect on profitability of commercial banks in Nigeria based on return on assets (β=0.003, p=0.0170) and net interest margin (β=0.0028, p=0.0380) and no significant effect based on return on equity (β=0.0027, p=0.0660). The study findings indicate that exchange rate fluctuation had a significant effect on return on assets (β=-0.0002, p=0.0440) and insignificant effect on return on equity (β=-0.0002, p=0.0560) and net interest margin (β=-0.0002, p=0.0510). Interest rate fluctuation had a significant effect on return on assets (β=0.0136, p=0.0090), return on equity (β=0.0139, p=0.0110) and net interest margin (β=0.0155, p=0.0010) of commercial banks in Nigeria. Bank competitiveness had a significant moderating effect on the relationship between price level fluctuation and return on assets (β=0.0414, p=0.0400), return on equity (β=0.0484, p=0.0130) and net interest margin (β=0.0415, p=0.0390). Bank competitiveness had no significant moderating effect on the relationship between exchange rate fluctuation and profitability. Bank competitiveness had no significant moderating effect on the relationship between interest rate fluctuation and profitability of commercial banks in Nigeria. The study recommends that managers of commercial banks should fully anticipate price level fluctuation in the country and that of other countries which they also operate in. In periods of severe exchange rate fluctuation, bank management should hedge against this by increasing their divestment options and switching trading options to less volatile currencies. Bank managers can take advantage of periods of high loan demand and moderately charge higher loan rates accordingly. Price discrimination can also be employed by the managers of commercial banks by attaching different interest rates on loans for different customers which can be guided by their credit history.

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