The effects of financial liberalization on the financial performance of commercial banks in Kenya

Abstract

The banking industry is one of the sectors that play an important role in the allocation and distribution of capital resources and risk sharing of future flows in any given economy or country. The objective of the study was to determine the effect of financial liberalization on the financial performance of commercial banks in Kenya. The study adopted a descriptive survey of commercial banks in Kenya. The target population for this study included all commercial banks that are registered and currently operating in Kenya. The study used secondary data since the nature of the data was quantitative. The data was collected from a number of sources such as the audited financial statements of the sample commercial banks; the Central Bank of Kenya and the Kenya National Bureau of Statistics. The data collected was sorted and organized before capturing the same in Statistical Packages for Social Sciences (SPSS) for analysis. The study focused on five key variables namely the dependent variable which was measured using return on equity (to measure financial performance of commercial banks), financial liberalization index was measured using the independent variables namely: local deposits, level of financial intermediation, financial liberalization and financial growth. A regression analysis was conducted to assist the researcher in establishing the effect of financial liberalization on the financial performance of commercial banks in Kenya. Coefficient of determination was used to determine whether the model was a good predictor. Correlation was used in establishing the relationship between financial liberalization and financial performance of commercial banks in Kenya. A t-test was used to test the hypothesis that a particular coefficient is significantly different from zero or whether the estimated coefficient value occurred by chance in equation. The data tests was performed at 95% level of confidence. The study concluded that there was negative relationship between financial liberalization and financial performance of commercial banks in Kenya. The researcher therefore recommends that there is need to measure the financial performance of commercial banks with other variables other than financial liberalization index.