The Relationship Between Asset Quality and Profitability of Commercial Banks in Kenya

Abstract

The objective of this study was to examine the relationship between asset quality and financial performance of commercial banks in Kenya. The study employed a descriptive research design. The data were obtained from secondary sources like company reports and the NSE handbooks. The study used descriptive statistics, correlation analysis and ANOVA to analyze the data. The regression model was employed to analyze the data. The results show that only NIE, EQASS, INFL and MKTCAP are negatively related to ROA. However, the negative relationship is not statistically significant except for INFL. Moreover, only LLP, NII, and GMS are positively related to ROA. But only LLP is statistically significant at 5 percent confidence interval. All the variables in the empirical model had the theoretically expected relationships except for LLP that was positive and significant. Therefore, asset quality as measured by LLP positively influences ROA of commercial banks.