Determinants of Profitability of Commercial Banks in Kenya

Abstract

With the recognition that profitability is the major force that drives the entire organization, banks are according top priority to a company-wide profitability management process based on planning and control. The top financial institutions worldwide are developing profitability management systems that feature the creation of quantitative objectives, the careful monitoring of progress against these goals, tighter expense control, and more aggressive pricing and collection procedures. This research sought to establish the determinants of commercial banks in Kenya. To achieve this objective, the study employed a descriptive research design. Forty commercial banks were considered but researcher managed to obtain information from 35 commercial banks representing an 87.5 response rate. This research also relied on secondary data which was obtained from banks‟ annual reports and financial statements over a period of eight years between 2005-2012. The collected data was edited, coded and entered for analysis using the Statistical Package for Social Sciences (Version 17.0) computer package. Both descriptive and inferential statistics were used. The research findings revealed that there was a very strong positive relationship (R= 0.852) between the variables. The study also revealed that 72.7% of commercial banks profitability in Kenya could be explained by the ten factors under study. From this study it was evident that at 95% confidence level, the variables produced statistically significant values and can be relied on to explain commercial banks profitability in Kenya. However, increased management efficiency, adoption of internet banking and increased customer deposits explained commercial banks profitability to a great extent. xii Based on the research findings the following policy recommendations were proposed: The management of commercial banks should ensure that electronic banking is embraced in all their transactions to increase efficiency and effectiveness in their service delivery; effective practices on human resource management should also be embraced; there is need to diversify the income generating activities of the banks so as to improve the stability of the bank. Operational expenses and proper risk management strategies need to be embraced by commercial banks so as to reduce their risk exposure more specifically on loan management.