Determinants of commercial banks profitability in Kenya: the case of Kenyan quoted banks

Abstract

This research is an attempt to identify determinants of profitability of commercial banks as a step towards providing practical guide towards improved profitability. A study in Malaysia by Guru, (1999), raised questions, which are relevant to this study: • Why are some commercial banks more successful than others? • To what extent, are the performance disparities due to variations In management controllable internal factors and to what extent; do environment related external factors influence the performance of these institutions? This study was based on a sample of seven local Kenyan commercial banks quoted on the Nairobi Stock Exchange (NSE). The period of study spans over ten years from 1993 to 2002. The profitability determinants were basically divided into two main categories, namely the internal determinants and the external determinants. The internal determinants included management controllable factors such as liquidity, capital adequacy, asset and liability portfolio management and expenses management. On the other hand, the external determinants included those factors, which are beyond the control of the management of these institutions such as ownership, firm size and external economic conditions such as inflation rates, market interest rate, regulatory conditions and market growth. Regression analysis was applied to a linear model to analyze the profitability determinants of the Kenyan commercial -. banks. The research methodology was adopted from a study conducted in Malaysia by Guru (1999). The findings of this study revealed that sound asset and liability management was found to have a significant influence on profitability. Among the external factors, high market interest rate was found to have an adverse effect on commercial bank profitability in Kenya. On the other hand, market share was found to have a positive impact on profitability. The above findings provide an insight into the characteristics and practices of the successful commercial banks in terms of profitability. In view of these findings, conclusions can be made which may be useful to bank management policy makers and shareholders. Since there is no consensus on the financial factors that contribute to the bank profitability, it can be concluded that individual bank managers use different strategies to achieve their profitability objectives. Commercial banks should be prudent in providing credit for the financing of investments in highly volatile sectors such as the stock market and the property market. In this context, lending to the productive sectors with proper monitoring systems and sound credit management is recommended. In the case of investments in subsidiaries, the commercial banks must ensure that they have the knowledge and management expertise to properly supervise and manage the acquired businesses so that they do not affect the profitability of the acquiring bank.