A survey of the impact of operational losses on profitability of commercial banks in Kenya

Abstract

Profitability is cited as a major predictor or determinant of business failure. Ratios used to measure profitability have shown to be suitable predictors of subsequent insolvency of firms. This study addresses the impact of operational losses on profitability. Data from 30 commercial banks was obtained and analyzed using SPSS package. This study shows that there was an upward trend in year 2002, downward trend in 2003, upward trend in 2004 and a downward trend in year 2005 of operational losses ratio for the industry. This study shows a zigzag movement. The relationship between profitability and level of operational losses was found to be direct and negative for the industry. The findings reveal that the trend of operational loss level kept on varying from year to year without a clear defined direction for most of the commercial banks. Most of the commercial banks had an upward trend in years 2001, 2002 and 2003 followed by a downward trend in years 2004 and 2005. The relationship between profitability and level of operational losses was found to be direct and negative for most of the commercial banks. Some commercial banks show a positive relationship such that increase in operational losses will lead to increase in profitability. The relationship was found to be significant. The category most affected is the big banks mostly government owned commercial banks. The large foreign owned banks indicated lower significance levels as compared to large locally owned commercial banks. The small commercial banks foreign owned indicated a lower significance level as compared to small locally owned commercial banks. The result of this study is consistent with findings of other researchers on the effect of operational losses on profitability. This study shows that the impact of operational losses on profitability of commercial banks is significant as opposed to general believe that the impact of operational losses on profitability of commercial banks is not significant.