The Determinants of Banks Profitability in Kenya

Abstract

The Kenyan banking sector has persistently exhibited resilience in the midst of the global financial instabilities. This has been heightened by modernization of the banking sector operations in terms of credit information sharing mechanism as well strengthening of the payment systems for efficiency and effective services. Indeed, increased competition in the Kenyan banking system is attributed from large entry of foreign banks as well as ongoing reforms and restructuring within the overall financial system together with the emergence of an enlightened banking population. The main objective of this study was to investigate the determinants of banks profitability. Specifically, the study investigated the influence of industry specific and external factors on banks’ profitability. The study empirically evaluates the link between internal and external determinants over profitability over a period of ten years (2002 to 2012). This study adopted the econometric model used to measure profitability of the banking sector by Athanasoglou, et.al, (2008); Goddard, et. al, (2004); and Davydenko, (2011). Looking at the variables collectively, it’s evident from the table that 77.6% of variation or change in the profitability as measured by ROA, ROE and NIM is explained by the determinant variables considered in the model which is also evidenced by F change 108.505>p-values (0.05). This implies that these indices are very significant (since the p-values< 0.05) and therefore need to be considered in any effort to boost profitability of commercial banks in Kenya. The study found out that the determinants considered have an impact on profitability of commercial banks in Kenya, therefore it recommends that the determinant variables on profitability measures should be taken in to account by central bank and advice commercial banks the best way possible on how to minimize their effect on profitability as they focus on maximizing profits and minimizing losses in a competitive market. 1 |