Funding Sources, Competitiveness, Firm Size and Performance of Commercial Banks in Kenya
Abstract
The nature of the funding source a commercial bank decides to adopt is a key performance
determinant. Ideally, banks make use of either shareholders’ equity, borrowed funds, or
customers' deposits to finance their operations. The liberalization in the sector has made it
possible for many players (ranging from the smallest to the biggest of them in terms of size) to
exist and as a result, each player has had to come up with a unique competitive way that allows
them to attract and retain the best funding sources capable of yielding positive performance.
Much as there are studies that have sought to investigate the concept of funding and performance
in the corporate world for both developing and developed economies, this study focused on
establishing the specific nature of relationships among funding sources, competitiveness, firm
size and performance of commercial banks in Kenya. The study sought to establish how sources
of funding influence the performance of these commercial banks, moreover, it further sought to
determine the mediating and the moderating effect of competitiveness and firm size respectively
on the relationship between funding sources and performance together with the need to
determine the combined effect of funding sources, competitiveness and bank size on the
performance of these banks. Pecking order theory was used as the anchoring theory since it
supports the argument raised in this study by postulating that there is a financial responsibility on
the side of the management to rank the available funding options and the one found to give the
firm more benefit will be deployed first followed by other funding sources as more deployment
may be required. A descriptive research design that conforms with a positivist research
philosophy was adopted and used to evaluate the four hypotheses formulated for each of the
study’s objectives. Secondary data obtained from 35 commercial banks operating in Kenya was
gathered between the years 2011 to 2021. The findings obtained revealed a direct significant
association between commercials’ bank performance and their funding sources as depicted by
the overall F-statistics probability of 0.0000, both r-squared value and adjusted r-squared value
of 0.596996 and 0.553650 respectively. On the other hand, the competitiveness of a bank was
discovered to intervene in the relationship between commercials’ bank performance and their
funding sources. Bank size was found to be a moderator in the relationship between a bank’s
funding source and their performance only if customers' deposit is used as a source of funding,
and the contrary is true if either deposit due to other banks or shareholders' equity is used as a
funding source. For joint effect, an inspection of individual variables within the model further
indicates a statistically non-significant in three out of the five explanatory variables under
consideration that is, two explanatory variables that were found to have a statistically significant
association were both shareholders’ equity and log total assets. As a result of these findings,
there is a need for bank managers to adopt techniques that enable them to source funds with
relative ease and at a cheaper cost as this will enable them to maximize their profit and hence
enhance performance. Managers must therefore develop a financial policy that guides them in
choosing a particular funding source while taking into consideration the fluctuation of business
volume, the character of the firm’s asset, the level of competition, firm size, and expected
stability of profit among others. In addition, banks’ management must be cognizant of the fact
that relying on customers' deposits for long-term funding may prove to be catastrophic if there is
an avalanche of requests for withdrawal within a short period as this has in the past destabilized
some banks.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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