An evaluation of the financial performance of non banking financial institutions that converted into commercial banks in Kenya

Abstract

The focus of this study was to evaluate the performance of Non banking financial institutions (NBFls) that converted to fully fledged commercial banks. This was achieved by comparing various performance indicators of these institutions namely: Earnings and Profitability, Capital Adequacy, Liquidity and Asset Quality and Financing for the periods prior and after their conversion. A ten year period was chosen for this study; five years before and five years after conversion. Means of these performance indicators for each NBFI were computed and the differences compared to determine whether there were any significant differences in the means across the two periods. The t-test was used to test the null hypothesis that there existed no significant difference in performance of the NBFIS before and after conversion. Out of the sample of 11 NBFIS whose data virtually all of the 13 performance measures of performance compared for each institution suggested no significant differences across the two periods. From these research findings therefore, it is evident that the policy shift by the regulators of subjecting NBFls to the same stringent conditions of cash ratio and capital adequacy ignored more fundamental issues that the NBFls that failed prior to the shift of policy may have faced. The findings have also brought the capacity of managements of financial institutions and banks in Kenya into sharp scrutiny considering that it was not mandatory to convert NBFIS to banks. While a few opted to retain their status quo, the bulk of them responded to the new regulations by choosing the easier, albeit more expensive, option with results that clearly could not justify the investments made. It is hoped that this study will be a valuable addition to the scanty body of knowledge in banking in Kenya and a source of insight into prevailing trends and challenges in the industry.