Analysis of factors influencing the profitability of listed Commercial banks in Kenya

Abstract

Commercial banks financial performance in Kenya is an important subject given the significant role the banks play in the economy. With the number of banks increasing over the years and competition for customers increase, an analysis of what factors influence banks’ financial performance is important to the banks as this can aid them in ascertaining the determinants of performance and by extension know the areas to improve in order to perform better. This study was designed to analyze the factors influencing the profitability of listed commercial banks in Kenya. In order to achieve the objectives of this study, the research was designed as an explanatory study. The population was all the11 listed commercial banks byDecember2016. All the banks were used in the study. A ten year secondary data from 2008 to 2016 was collected from Banking Survey and the Central Bank of Kenya. Descriptive analysis, correlation analysis and regression analysis were used to perform the data analysis. Significance was tested at 5%level. The study found that inflation rate was negatively correlated with ROA while capital adequacy, asset quality, management efficiency, liquidity management and GDP growth rate had a positive influence on ROA. Inflation rate had a negative effect on ROA. It was noted that the independent variables accounted for 77.79% of the variance in ROA and were all significant at 5% level of confidence. The model had a good fit. The study concluded that all the determinants tested in this study had a significant influence on the financial performance of commercial banks in Kenya. The study recommends that there is need for commercial banks to improve their performance in terms of their ROA. The study also recommends that banks should ensure that they have enough quality assets since asset quality was found to be the most significant factor of banks’ productivity.