Effect of bank size and financial risk exposure on financial performance of commercial banks in Kenya
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Date
2018-03
Authors
Konya, Nelly M.
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
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.
Description
A thesis submitted to the school of business in partial fulfilment of the requirements for the award of the degree of doctor of philosophy in business (finance option) of Kenyatta University.
March, 2018