The Effect of Macroeconomic Factors on Financial Performance of Commercial Banks in Kenya

Abstract

The aim of this descriptive as well as correlational study was to determine the effect of macroeconomic factors on financial performance of commercial banks in Kenya. The performance measure of commercial banks used was the Return on Asset (ROA) which was regressed against the macroeconomic variables including GDP growth rate, the exchange rate (US dollar), the money supply (M3), Inflation (CPI), and Lending Rate of the sampled commercial banks. The period of the study was ten years from June 2002 to June 2012. The study employed quarterly secondary data which was obtained from the Central Bank of Kenya, Kenya National Bureau of Statistics and published quarterly financial statements from commercial banks selected in the sample. Data was analyzed using Pooled Least Square Method which assumes linearity between the dependent variable and the independent variables and the analysis technique was multiple regression aided by research software „eviews‟ version 7. The financial performance of commercial banks as measured by ROA was found to be positively correlated with GDP growth rate, money supply (M3), lending interest rate of individual commercial banks and inflation, and negatively correlated with exchange rate. The findings confirmed the researcher‟s priori expectation that ROA would be both positively and negatively correlated with the independent variables. vi The rest of the paper is organized as follows: chapter one covers introduction to the study by addressing issues related to background of the study, statement of the problem, study objective and the significance of the study; chapter two focuses on literature review; chapter three is about the research methodology; chapter four covers data analysis, results and discussion; and lastly chapter five addresses summary, conclusion and recommendation.