The Effect Of Funding On The Financial Performance Of Commercial Banks In Kenya

Abstract

The study sought to establish the impact of funding on the financial performance of commercial banks in Kenya. Banks operate by attracting funds from various sources and lending these funds to customers. The difference between the cost of funds and the interest income from the loans determines banks’ profitability. The aim of this study was to establish whether there is a relationship between funding and profitability of commercial banks in Kenya. The population of the study comprised of all the 44 commercial banks that were operating in Kenya during the period 2010 to 2014. For a bank to have qualified to be included in the sample of the study, it needed to have been in operation during the entire period of the study and therefore, institutions that were not in operation in the entire period of study were eliminated. The study employed the use of secondary data obtained from the Bank Annual Supervision Reports that were available on the website of the Central Bank of Kenya. Return on assets was used as a measure financial performance. Loans and advances to deposits ratio, loans to total assets ratio, and liquid assets to total assets ratio were used as measures of funding. The study used descriptive statistics and regression analysis to establish the relationship between the variables. The response rate was 97.7% in that 43 out of 44 banks satisfied the sampling criteria. The R2 of the model was 0.2252 at a confidence level of 95% meaning that 2.25% of financial performance of commercial banks in Kenya is explained by funding. Therefore, 97.75% of financial performance of commercial banks in Kenya is attributable to factors other than funding. The study recommends that banks should retain a suitable mix of funding to satisfy both the profitability and liquidity objectives.