Performance implications of mergers and Acquisitions in the banking industry in Kenya

Abstract

Recent economic reforms in Kenya have significantly improved its macroeconomic indicators and financial sector. Banks have witnessed significant merger and acquisition activity as a result of these reforms in attempts to privatize and strengthen the banking sector. This study measures the performance implications of Kenyan banks that have undergone mergers or acquisitions during the period 2000-2010. This is done by calculating their return on equity, Return on Asset, Debt to Equity and Capital Adequacy Ratio, ratios in order to determine the degree of success of banking reforms in strengthening and consolidating the Kenya banking sector. Secondary data from audited annual reports of accounts of the population of interest and CBK bank supervision annual reports were used. The analysis of the financial institutions performance for pre and post-merger was collected for 4 years pre and post-merger. The research findings indicate that banks that have undergone deals of mergers or acquisitions have shown significant improvements in performance and return on equity and Return on Asset when compared to their performance before the deals. CAR significantly improved signifying that mergers and acquisitions internal strength to withstand losses in case of emergency improved. Debt to equity ratio increase clear indication that leverage increased. It was concluded that mergers and acquisitions have had clear positive performance implication of mergers and acquisition of banks in the Kenyan banking sector. These findings do support the process of financial consolidation and banking reforms observed in Kenya, and provide evidence to support their constructive role in improved bank profitability and economic restructure.