Financial Deepening and Financial Performance of Commercial Banks in Kenya

Abstract

The collapse of some of the commercial banks in Kenya has raised concerns over the financial performance of the banking industry. Due to this challenge, stakeholders including creditors, depositors, employees and investors have incurred huge financial losses. This study sought to decide the impact of economic deepening on financial overall performance of commercial banks in Kenya. The particular goals were to study the impact of interest prices, government guidelines, bank deposits and bank credit on economic performance. Four theories guided the study including Mckinnon’s financial repression theory, liquidity preference theory, financial liberalization theory and theory of financial deepening. Descriptive research technique was adopted. The target group was 43 Commercial Banks, where data was obtained for a duration of eleven years from 2007 to 2017.The findings indicated that bank deposits had a positive and significant effect on financial performance (=0.466, p=0.049), bank credit had a positive and significant effect on financial performance (=0.525, p=0.048), and government policies had a favorable and substantial effect on commercial bank monetary outcome in Kenya (=5.151, p=0.000). However, the impact of interest rates on financial performance (P>0.000, 0.793) was statistically negligible. All predictor factors, except interest rate, positively and significantly affect financial performance of commercial banks in Kenya, according to the study. Government policies, in particular, were discovered to be the most important predictor of financial success, followed by bank lending, bank deposits, and interest rate. The study concluded that commercial bank management should consider decreasing the interest rates they charge on credit based on the findings. This will enable more people to access loans and will also translate into increased financial returns. The Central Bank of Kenya should streamline banking policies in order to enhance performance of the banks. The banks management should develop effective savings mobilization strategies such as product development and marketing strategies. The management of commercial banks should widen their credit base and advance credit to more customers. This will ensure that they make more profits