Effect Of Selected Firm Characteristics On Financial Performance Of Commercial Banks In Kenya

Abstract

Commercial banks operate in a turbulent business environment and this calls for an understanding of their internal and external factors to enable them to increase their financial performance. This study’s objective was to examine the influence of selected firm characteristics on financial performance of commercial banks in Kenya. Precisely, the study sought to establish the influence of capital adequacy, board composition, management efficiency and working capital on financial performance of commercial banks in Kenya. The study was anchored on the buffer theory of capital adequacy, agency theory, performance theory and the liquidity-profitability trade-off theory. The study was carried out using a longitudinal design. The 42 commercial banks operating in Kenya by December 2019 were the study population. Secondary data from 2015-2019 was collected from Central Bank of Kenya’s yearly banking surveys, and the commercial banks’ financial statements. To analyse the collected data, the study applied the panel data regression model. The appropriate diagnostic tests were conducted before and after fitting of the model. The study findings established that capital adequacy had a significant and negative influence on financial performance measured through ROA (β = -0.3186, t = -5.43, p < 0.05), but had no significant influence on financial performance measured through ROE (β = 0.4091, t = 1.29, p = 0.200). The study also determined that board composition had no significant effect on the financial performance of the commercial banks as indicated by ROA (β = -0.2555, t = -0.11, p = 0.91) and ROE (β = -1.64, t = -0.13, p = 0.893). Moreover, the study findings determined that management efficiency had a significant and negative influence on financial performance measured through ROA (β = -0.2105, t = -11.43, p < 0.05) and ROE (β = -0.9342, t = -9.37, p < 0.05). The findings also established that working capital had no significant effect on the financial performance of the commercial banks as indicated by ROA (β = -0.7792, t = -1.01, p = 0.312) but had a significant and negative influence on the financial performance of the commercial banks as indicated by ROE (β = -8.3384, t = -2.00, p =0.047). The research offers the following recommendations based on its findings. First, the study recommends to Central bank of Kenya to be vigilant to ensure that the minimum CAR for commercial banks in Kenya is met by all banks. Regarding management efficiency, the study recommends to commercial banks in Kenya to have a suitable and organized policy framework to guarantee financial management efficiency. Lastly, the study recommends to commercial banks to carefully balance their working capital to balance the risk and returns that come from holding liquid assets and current liabilities.