BANK SIZE AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

Alex K Muhindi

Department of Accounting and Finance,

School of Business, Kenyatta University

Dr Francis K Gitagia

Department of Accounting and Finance,

School of Business, Kenyatta University

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CITATION: Muhindi, A., K. & Gitagia, F., K. (2023) Bank Size and Financial Performance of Commercial Banks in Kenya. International Journal of Strategic Management. Vol. 12 (3) pp 1 -25

ABSTRACT

The financial performance of commercial banks is important to the stability the Kenyan economy. However, some commercial banks experienced declining financial results in the year 2015-2019 for example the declining Return on equity of equity bank from 47.2%-37.2%, Absa Bank 30.4%-26.4% and Stanbic bank 25.1%-21.2% and the Bank of India 20.15%-18.0%. Over the same period, the collapse of Chase bank, Imperial bank, Dubai bank and the poor performance of National bank of Kenya was generally attributed to poor financial performance. Bank size have long been linked to financial performance; However, there has not been a consensus amongst empirical studies on the effect of bank size variables including the total net asset, the bank capital and client deposits on financial performance of banks. The general objective of the research report was to establish the effect of bank size on financial performance of commercial banks in Kenya. The specific objectives of the study were; To evaluate the effect of the customer deposits on financial performance of commercial banks in Kenya, to elaborate the effect of total net assets on financial performance of commercial banks in Kenya and to determine the effect of bank capital on financial performance of commercial banks in Kenya. The research additionally considered the moderating effect of Gross Domestic growth rate on the relationship between bank size and financial performance of commercial banks in Kenya. The financial performance measured by use of return on equity was the dependent variable. The study was anchored on theory of economies of scale, financial intermediation theory, stakeholders’ theory and modern portfolio theory. The research used descriptive survey design. The target population was all commercial banks in Kenya. A census of all commercial banks in Kenya was carried out. The study utilized secondary data from financial reports as published by central bank of Kenya and Kenya National Bureau of Statistics for the period between 2015-2019.Panel regressions analysis and Pearson’s product moment correlation analysis were used for inferential analysis while means and standard deviations were utilized for purposes of descriptive analysis. The regression result of the study was that bank size had a positive effect on financial performance of banks. In particular, the research found that, the customer deposit p=0.491; Total net asset p= 0.011, Bank capital p= 0.034 and Gross domestic growth p= 0.000 had a statistically effect on financial performance. The correlation analysis showed that there was a positive relationship between customer deposit, Bank capital and total net asset on Return on equity of banks. The study concludes the that banks that had huge customer deposits, huge bank capital and huge net asset had a positive financial performance. The study recommends that policy initiatives geared towards increasing the customer deposit, bank capital and the total net assets of the commercial banks to be considered and shareholders or managers could also adopt mixed strategies internally generated, fund raising or mergers and acquisitions. This research was limited to this research only and hence further research need to be done for other sectors in the Kenyan economy.

Keywords: Bank Size, Bank capital, Client deposits, Financial Performance, Total Net Asset, GDP Growth

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