Determinants of Commercial banks profitability in Kenya

Abstract

The commercial bank profitability growth index is an important criterion for measuring the performance of commercial banks in Kenya but in the past it has been on a declining trend. This study assesses, the determinants of commercial bank profitability. The study specifically establishes the internal and external determinants of commercial bank profitability. The period of study was 2000 - 2009 and the data was obtained from Central bank supervision reports and Kenya Economic surveys. The study used panel data approach and the analysis measures the relationship between profitability of commercial banks in Kenya and its possible determining factors namely: liquidity, capital, expense management, bank size, interest rate, exchange rate, market share, concentration, loan loss provisions, inflation, GDP per capita. The study found the coefficients for liquidity, capital, expense management, bank size, market share, inflation and loan loss provisions as the most significant. On the other hand, coefficients for interest rate, exchange rate, concentration and GDP per capita were the least significant on profitability performance in Kenyan commercial banks. From this study therefore, coefficients for the internal determinants were found to be key to the profitability of commercial banks as most coefficients for internal determinants turned out to be significant. As a matter of policy implications, several proposals were drawn at the bank level due to the significant internal determinants of commercial bank profitability and at the nation level due to the significant external determinants of commercial bank profitability. These policies include ensuring sound macroeconomic policies are set, bank capitalization regulations, liquidity policies, all these geared towards reversing the declining trend of the pace of growth in profitability for Kenyan commercial banks.