Financial Deepening and Profitability of Commercial Banks in Kenya

Abstract

The link between financial deepening and economic growth has long received significant attention in economics, however, the waves of financial deepening cannot raise the tide of the economy without affecting bank profitability; it is against this background that this study was formulated to examine the effects of financial deepening on profitability of commercial banks in Kenya. The study targeted all the commercial banks in Kenya. Secondary data was collected from the Kenya National Bureau of Statistics, Central Bank of Kenya and websites of licensed Commercial banks in Kenya. The study used both explanatory research design and inferential statistics to investigate the effect of financial deepening on profitability of commercial banks. The findings of the study revealed that financial deepening affects bank profitability positively. The results of this paper therefore, present a strong argument towards increasing financial deepening as an important stimulator of greater banking profitability. While Kenya still exhibits relatively low levels of financial deepening, commercial banks profitability displays an increasing trend in recent years. An expansion of credit to the private sector may be an important determinant of further banking profitability increases in the future. Therefore, policy oriented measures in the country should take in consideration the positive causality between financial deepening and banking profitability change and try to increase the level of credit to the private sector as a stimulant of economic growth.