Macro-Economic Factors and Financial Performance of Commercial Banks in Kenya
Nyabute, Samuel Omboke
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Banks are essential due to their contribution in the economic success of countries. However, the intermediation performed via banks is dependent on the banks performance. Banks’ financial performance is the core mandate in venturing into business. Commercial banks in Kenya have continued to experience poor performance which is shown in the return on equity of banks. This has over the years been a major source of concern in Kenya’s financial sector. Performance of banks is accredited to the Macro-economic background. The government through the Central Bank uses macro-economic tools with the objective of managing and attaining price stability, economic growth, smooth business cycles, full employment and prevention of financial crises. Therefore, commercial banks serve as a framework for the Central Bank in implementing these tools and hence the basis for this study. Researches undertaken on macroeconomic aspects and bank financial performance were majorly not based on Kenya but other nations. The current study required to assess the consequence of macro-economic factors on Kenyan Banks’ performance. The study assessed the effect of CBK rate, money supply, exchange rate and inflation on bank performance in the context of Kenya. This research was based on Agency Theory, Interest Rate Parity Theory, Quantity Theory of money and deflation theory. The study adopted causal research design. Furthermore, the study used of panel data collected using a document review guide. Scrutiny of data was based on a panel regression model. Research target population was Kenyan banks for the period of study which are 43 in total. The research used census approach as it covered all the 43 banks situated in Kenya. Tests for stationarity, multicollinearity and normality were conducted. The presentation of results was done using tables. The research results showed that CBK Rate had a negative and significant effect on financial performance of commercial banks in Kenya. Secondly, it was found that money supply had a positive and significant effect on financial performance of commercial banks in the context of Kenya. Thirdly, the outcomes from the regression analysis point to the fact that inflation had a negative and insignificant effect of financial performance of commercial banks in Kenya. Finally, the results of the study revealed that exchange rate has a positive and insignificant effect on financial performance of commercial banks in Kenya. the study concluded that Central Bank Rate and money supply have significant effect on financial performance of commercial banks in Kenya. The study further concluded that inflation and exchange rate have insignificant effect on financial performance of commercial banks in Kenya, The recommendation from the study was that Kenya’s Central Bank ought to be cautious in setting the base rate, it should be go lower rather than higher as this impacts negatively on bank performance. Also, the study recommended that the government of Kenya through the apex regulatory body should ensure adequate money supply in the country’s economy as higher supply results in enhanced financial performance of commercial banks. The recommendation 0f the research was that further studies should incorporate liquidity ratios in assessing the financial performance of commercial banks.