The effect of macroeconomic variables on operational efficiency of banking sector in Kenya

Abstract

Operational efficiency aspect for national banking industry is one of the most important aspects that must be considered by any banking managements in order to earn healthy and sustainable financial performances. Macroeconomic variables are factors that are pertinent to a broad economy at the regional or national level and affect a large population rather than a few select individuals. These factors are external and beyond the control of the bank and determine the operational efficiency of commercial banks. The study sought to establish the effect of macroeconomic variables on operational efficiency of banking sector in Kenya. The study employed descriptive as well as correlation research designs. This study used secondary data that was obtained from publications, government and private financial reports, newsletters, journals and business magazines. The figures for the operational efficiency were acquired from the central bank of Kenya libraries. In addition, annual reports of the banks were reviewed to obtain information on the variables. Data on macroeconomic variables was collected form the KNBS. Data Envelopment Analysis (DEA) was used to measure technical efficiency of the commercial banks. The research conducted regression statistical test to identify any common features of the efficient banks and to investigate the significance of the relationship between the technical efficiency score and various determinants. The study found out that there were factors influencing the operational efficiency of the banking sector in Kenya, which are exchange rates, lending rates, GDP and inflation. The study concluded that the relationship between inflation and operational efficiency of the banking sector in Kenya is negative and significant. The study recommends that the government should come up with strategies and policies to protect the banking sector due to its immense contribution to the economy of the country. Since the study focused on the effect of macroeconomic variables on operational efficiency of the banking sector in Kenya, further studies should be done on companies in micro finance institutions to find out whether the study will give the same results.