The Effect of Selected Internal Factors on the Financial Performance of Commercial Banks Listed in the Nairobi Securities Exchange

Abstract

To ensure financial stability and growth of the Kenyan banking industry, it’s necessary to find out the factors that affect the financial performance of the sector. The objective of this study was to determine the effect of selected internal factors on the financial performance of banks listed at the NSE. The period covered in the research was five years, that is, from 2010 – 2014. The study used descriptive statistics, Pearson correlation, regression analysis and ANOVA to analyze the data that was collected. Return on Assets (ROA) was used as a measure of financial performance. The findings revealed that Capital Adequacy, Liquidity, Operational cost efficiency and Size of the bank do significantly affect the financial performance of commercial banks listed at the Nairobi Stock Exchange (NSE). The results suggest that the government should set up policies that encourage commercial banks to raise their capital base. This will ensure that the banks are cushioned in case of a country wide financial crisis. Commercial banks need to invest in efficient technologies that will further enhance their management of operational costs. Income diversification is a field that the commercial banks need to venture further in so as to make the banks more competitive in the market. The findings concluded that the selected factors considered only covered 53% of the financial performance and that there was need for further research on the remaining 47%.