Relationship between efficiency and financial performance of commercial banks in Kenya

Abstract

Efficiency has become an essential emphasis in today’s highly competitive business environment. Efficiency measurement determines how banks provide an optimal combination of financial services with a set of inputs. The objective of this study was to examine relationship between efficiency and financial performance of commercial banks in Kenya. The research adopted a descriptive survey design. The population of interest for this study was all the commercial banks in Kenya. Thus it was a census survey. The study utilized secondary sources of data. In order to situate the study theoretically and generate the conceptual framework with which to work on the secondary sources was obtained from financial statements of the banks for a 5 year-period (2007-2012) and publications were also used. From the findings, there was a fall in efficiency ratio from 2008 to 2012 in banks indicating that the banks were making considerably more than they were spending thus depicting a sound fiscal footing. The findings revealed a significant positive relationship between Return on Asset and Efficiency. In conclusion taking into consideration of the results provided, certain inputs are vital which impact on the level of efficiency of these banks. This implies steps towards efficiency of these banks include great consideration of their capital structure. Congruently, these loans could become bad hence banks have to make provisions for bad and doubtful debt; this on the other hand reduces efficiency. It is recommended for the commercial banks to think about the cost efficiency especially they are technically efficient while they are not superiors in their ROAs. Also the banks should consider efficiency and cost efficiency analysis as important factor in their profitability and risk analysis and management. Further, it is recommended for the Central Bank to take in consideration the potential improvements needed for each variable for the banking sector as a whole in order to assume more advisory and regulatory role.