The relationship between firm size and financial performance of commercial banks in Kenya

Abstract

This study had the objective of evaluating the relationship that exists between firm size and financial performance. The effects of firm characteristics on firm performance have gained attention in recent theoretical and empirical work. Firm size is a construct of scholarly interest since it traditionally has much explanatory power, and an understanding of its importance can be vital for managers who operate in today’s competitive environments. Discussions of the role of firm size in explaining firm performance have been ongoing in the fields of business organization and industrial economics. Early research emphasizes the importance of scale economies and other efficiencies in larger firms. This research was carried out using a correlational design. The target population of this study was all the 43 commercial banks in Kenya as at 31st December 2012. The panel data to be used was data from 1998 to 2012. This study used secondary data which was collected from Central Bank of Kenya and bank themselves. Firm size was measured using net assets , total loans , total deposits (measured in Kenya shillings) and number of employees. Financial performance was measured using Return on Assets (ROA). Data which was collected was analyzed using correlation and regression statistics. Analyzed data was presented in tables. Study findings indicate that there is moderate correlation between three of the studied factors of bank size which include total deposits, total loans and total assets. The relationship between three of the independent variables, namely, total loans, total deposits, and total assets and the dependent variable (financial performance- ROA) of commercial banks were all found to be statistically significant. Total deposits and total loans had relatively stronger effects on financial performance compared to total assets. There was no significant relationship between number of employees and financial performance for commercial banks in Kenya. The study recommends that in order for commercial banks to increase their performance (profitability) there is need from commercial banks to increase size by increasing various aspects of customer base, net assets, deposit liabilities and market share. The recommendations from the study include the need for bank policies that give greater importance to the determination and monitoring of their loan portfolio, customer deposits and asset quality. The study further recommends that for commercial banks to remain profitable they should have good portfolio management which will help in making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing deposits and loans against performance.