Determinants of profitability in the banking industry in Kenya: a case of commercial banks listed on Nairobi stock exchange

Abstract

Across the globe, the banking industry today enjoys a number of advantages compared to past years that would appear to contribute to their ability to generate profits. The importance of bank profitability can be appraised at the micro and macro levels of the economy. At the micro level, profit is the essential prerequisite of a competitive banking institution and the cheapest source of funds. It is not merely a result, but also a necessity for successful banking in a period of growing competition on financial markets. Hence, the basic aim of a bank's management is to achieve a profit, as the essential requirement for conducting any business. The objective of this study was to explore determinant of profitability in the banking industry in Kenya with specific focus to commercial banks listed in NSE where the variables were ownership, bank size, state of Information Technology (IT) and labour productivity. This research problem was studied through the use of a descriptive research design. According to NSE, there are 8 commercial banks listed in NSE. This study employed stratified sampling technique in coming up with a sample size of 86 from a total population of 207 respondents. The study relied mostly on primary data sourges where self-administered questionnaire was utilized as source of data. Data was collected purely quantitative. Quantitative data was coded and entered into Statistical Packages for Social Scientists (SPSS Version 17.0) and analyzed using descriptive statistics. The finding was presented inform of frequency tables and explanation was presented in prose. The knowledge established from this study would be useful in helping the regulatory authorities and bank managers to formulate future policies aiming at improving the profitability of the banking sector. From the study findings, the study concluded that there was a positive relation between firm ownership and bank profitability. Also the study concluded that bank size determines banks profitability. The study also concluded that banks with diverse products and services experience high profitability and that bank with high value of assets accrue more profits. From the findings, the study concluded that banks that have embraced creativity and innovation influence its profitability and that application of IT ease the process and procedure of banking. Finally, the study concluded that banks that promote its staff on merits encourage hard work which in turn increases its productivity. The study recommends that there is a dire need of involving the bank owners, bank management and other stakeholders for the welfare of the bank in order to mitigate perception that banks are for a certain class in society or community. On bank size, the study recommended that banks open new branches on the untapped potential areas for the banking services such as by opening more branches and ATM centers as such will enhance their profitability capacity. The study recommended that due to globalization and technological innovation in the modern environment, banks should not be exempted from this innovation since its one of the major drivers of profitability within organizations. On labour productivity, the study recommended that employees should be motivated in their working both intrinsic and extrinsic in order to enhance their working attitude for the benefit of the organization, particularly by increasing its profitability.