Financial Management Practices and Financial Performance of Tier One Commercial Banks in Kenya
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Date
2023
Authors
Dahir, Naima Abdirashid
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Financial performance of tier one banks contribute significantly to the growth of financial
sector and the economy as a whole due to huge market share, asset base as well as
customer deposits. These contribution can be derailed due to challenges in the sector that
range from technology, regulation and even governance which can lead to low financial
performance. It is due this background that this study's general objective was to examine
the impact of financial management practices on the financial performance of Kenya's
top-tier commercial banks. The study specifically examined the effect of investment
decision, fixed asset management, liquidity management decision and financing decision
on financial performance of tier one commercial banks in Kenya. The study was
governed by agency theory, pecking order theory and resource based view theory. The
study employed causal-effect research design. The target population of this study
comprised of the eight tier 1 commercial banks in Kenya. Secondary data was collected
using a secondary data extraction form was utilized in the study to gather information on
the metrics of investment decision, fixed asset management, cash management, financing
decision and the financial performance of Tier 1 commercial banks for the years between
2017 and 2021. Panel regression model was applied with the help of STATA software
version 14. Before the actual analysis the diagnostic tests were measured i.e.
muticollinearity, normality, heteroscedasticity, stationarity and hausman tests.
Descriptive statistics like mean and standard deviation were used to assess quantitative
data. Inferential statistics like correlation and regression analysis were utilized to assess
the relationship between variables and the degree to which they influence one another.
Data was presented in figures and tables where applicable and all the ethical
considerations were taken care of. The study found that investment decision had
insignificant effect on financial performance. The results indicated that fixed asset
management had a positive and significant effect on financial performance. The findings
indicated that liquidity management decision had positive and significant effect on return
on asset. The study found that financing decision had negative and significant effect on
financial performance. The study recommended that banks should adhere to a disciplined
investing strategy and refrain from market timing. Ensure guarantee they are sufficiently
competitive in the market; be receptive sufficient to economic developments that might
make them obsolete owing to financial crises. As a result the study recommends that the
banking industry regulator, the Central Bank of Kenya, maintains the regulation over the
financing aspect of commercial banks which includes among others maintaining a
minimum liquidity ratio of 20%. The study recommends that the commercial bank
management should limit their dependence on long-term debt as a source of financing. To
improve the performance of commercial banks in Kenya, it is also suggested that an
aggressive financing program and a prudent investment policy be implemented.
Description
A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fulfillment of the Requirement for the Award of the Degree of Master of Business Administration (Finance) of Kenyatta University, June 2023.
Keywords
Financial Management Practices, Financial Performance, Tier One, Commercial Banks, Kenya