Capital and Loan Characteristics and Financial Performance of Commercial Banks in Kenya
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A stable banking sector is important for the growth of an economy, for that reason it is essential to have a robust banking system to ensure economic stability. Kenyan banks have however, experienced diminishing Return on Assets between 2010 and 2019. During the same period Dubai Bank and Imperial bank of Kenya have gone under with the cause being traced to capital and loan characteristics. Current study, therefore, sought to establish the nature and extent to which capital and loan characteristics determine the performance of Kenyan banks. The specific objectives evaluated the effect of capital levels, liquidity, non-performing loans and rates of interest on the performance of Kenyan commercial banks. The study utilized Moral Hazard Theory, Buffer Capital Theory, Financial Intermediation Theory and Loanable Funds Theory to anchor the relationship between the study variables. A causal research design was used with a target population of 39 banks operating during the study period 2015 to 2019. A census was carried out on the banks, and secondary data was obtained from the bank’s financial reports. Panel regression model was used for data analysis using the Stata Software. Diagnostic tests including Bivariate, correlation analysis, multicollinearity test, autocorrelation test, unit root test, normality test and model specification test were conducted. Finally, ethical considerations were adhered to through the entire research process including seeking authority from the university and NACOSTI. Observations from the regression revealed that: capital adequacy affected positively and insignificantly the performance of Kenyan commercial banks whereas liquidity and non-performing loan affected the performance of Kenyan commercial banks negatively and significantly respectively. Furthermore, interest rate negatively and insignificantly influences the performance of Kenyan commercial banks. The research suggests that bank managements should reduce their liquidity by assessing the feasibility and viability of investment opportunities by customers to reduce the rate of non-performing loans of the banks. The bank managements should avoid increasing loan liabilities without recovering the existing ones to reduce the rate of non-performing loans. This will allow for efficient utilization of loanable funds by borrowers and optimal decision making by the management of the banks in terms of loan recovery. The policy makers should provide a maximum level of loans which commercial banks should offer to customers to ensure banks are not liquidated spontaneously. This should be done through strict sanctions on banks that violate the minimum reserve liquidity requirement. Additional studies can be conducted on the moderating effect of bank size on the relationship between capital, loan characteristics and financial performance of commercial banks in Kenya.