The effect of internal variables on the profitability of commercial banks in Kenya

Abstract

The banking sector in any economy serves as a catalyst for growth and development. Banks are able to perform this role through their crucial functions of financial intermediation, provision of an efficient payment system and facilitating the implementation of monetary policies. Bank profitability is usually expressed as a function of internal and external determinants. The overall performance and profitability of the banking sector in Kenya has improved tremendously over the last 10 years. The aim of this study was to close the gap in knowledge by investigating how internal variablesi.e. loan portfolio quality, Asset value; Administrative costs and liquidity affect profitability within commercial banks in Kenya. The study used secondary data from annual Bank Survey Reports from CBK and Economic Survey Reports from KNBS for the period 2009 to 2013. A multiple linear regression model was employed to obtain the desired results. The analysis showed that Loan portfolio quality, liquidity, asset value and administrative costs have statistically significant impact on profitability. Based on the results and findings, the study recommended policies that would encourage capitalization of banks (asset value), reduce costs of their operations, and minimize on the credit risk while encouraging banks to minimize their liquidity holdings. The study therefore, provides additional knowledge about Kenyan commercial banking sector profitability that is important for policy making.