The relationship between firm-specific factors and financial performance of commercial banks in Kenya

Abstract

Bank - Specific factors are internal factors which influence the financial performance of a specific bank The objective of this study was to determine and evaluate the relationship between bank-specific factors; capital adequacy, asset quality, liquidity and management efficiency on the financial performance of Commercial Banks in Kenya. This study used secondary data of the 43 Kenyan commercial banks from 2008 to 2012 obtained from the CBK and Banking Survey 2012. The data was analyzed using Multiple Regressions method. The findings show that bank specific factors considered are significantly associated with financial performance as indicated by the positive mean values and their respective standard deviations. This means that bank specific factors variables considered in the study Capital Adequacy, Liquidity, Management Efficiency and Asset Quality are very crucial in affecting financial performance of commercial banks in Kenya. My results show that the capital strength of a bank is of paramount importance in affecting its profitability. A well-capitalized bank is perceived to be of lower risk and such an advantage will be translated into higher profitability. On the other hand, the asset quality affects the performance of banks adversely. In addition, banks with a large retail deposittaking network do not achieve a level of profitability higher than those with a smaller network. Based on the findings the study recommends policies that would encourage revenue diversification, reduce operational costs, minimize credit risk and encourage banks to minimize their liquidity holdings. Based on the findings the study recommends that these factors should be taken in to account by the management to avoid financial distress that may result due to poor management of the same. Further research on the said factors could add value to the financial performance of Commercial Banks and academic literature.