Effect of economic environment on financial performance of commercial banks in Kenya

Abstract

The banking industry has increasingly gained popularity in Kenya and beyond due to various changes in the market and economic environment. There has been quantitative and qualitative shift in trade and business opportunities across nations of the world. Furthermore, with the advent of liberalization, structural reform, and innovations in information technology, there is a significant increase in the international mobility of people, capital, knowledge, technology and materials. At the same time, the volatility in socio-economic performance of economies has increased. The increasing competition in the national and international banking markets, the change over towards monetary unions and the new technological innovations herald major changes in banking environment, and challenge all banks to make timely preparations in order to enter into new competitive financial environment. The general objective of the study was to investigate the effects of economic environment on financial performance of commercial banks in, Kenya. The research aimed at answering questions on the effects of inflation; exchange rate volatility; fluctuations of interest rate and balance of payment crisis to financial performance of commercial banks. The study was modeled on a Descriptive research design. The target population comprised all the 44 commercial banks in Kenya. The sample size comprised 22 branch managers and 22 finance managers from the various commercial banks. Data was gathered through semi- structured questionnaire and a few open ended questions and secondary data from the various commercial banks records such as financial statements, and CBK publications. Descriptive statistics was adopted as a method of analysing data and data presented in frequencies, pie charts, bar charts and percentages for comparisons, explanations and clarity in line with the study objectives. The findings of this study have revealed that economic environment affects the financial performance of commercial bank. More so inflation rate, exchange rate volatility,interest rate fluctuations and balance of payment deficits. The conclusions drawn from the research were that economic environment affects commercial banks credit growth and quality, liquidity, profitability and return on assets and this consequently affects totality of commercial banks financial performance. The findings and recommendations of this study is of great use to the Managing directors of commercial banks to cushion themselves against unfavourable economic environment and to the regulator (CBK) to deal with imbalances and risks in the economic environment.