Effects Of Firm Characteristics On Operational Efficiency Of Commercial Banks In Kenya

Abstract

The role played by Commercial banks in any economy in the world cannot be over-emphasized. Commercial banks in Kenya have contributed to savings which interprets to 78.55% of the total savings in the economy. The efficiency of commercial banks is of big importance in order to ensure that the financial sector is stable. There has been an increased cost of running a banking business that has led to increased cost of loans and customer dissatisfaction in commercial banks in Kenya. This study sought to examine the effect of firm characteristics on operational efficiency of commercial banks in Kenya by evaluating the effect of capital adequacy, asset quality and bank liquidity and on operational efficiency of commercial banks in Kenya. The study also assessed the moderating effect of bank size in the relationship between firm characteristics and operational efficiency of commercial banks in Kenya. The study stands to benefit researchers, policymakers and commercial banks. The study may face the limitation of non-response. The study was anchored on the liquidity preference theory, credit creation theory and buffer capital theory. The study is descriptive research design and targeted a population of 40 commercial banks licensed and operating in Kenya. Secondary data will be used which will be obtained public annual financial statements from the various commercial banks’ website and Central bank of Kenya website. The data collected was analyzed for descriptive and inferential statistics using Statistical Package for Social Sciences Version 26.0 and presented using graphs tables, charts and a linear regression equation. From the analysed data, there is weak relationship between capital adequacy and operational efficiency of commercial banks in Kenya as shown by a coefficient value was 0.15. Secondly, the assets quality is key in determining the operational efficiency of the commercial banks in Kenya as shown by a correlation coefficient of 0.717. Liquidity was established to be statistically correlating with operational efficiency in commercial banks in Kenya and this was shown in correlation value of 0.602. Bank size evaluated based on the total assets owned by the commercial banks revealed a strong positive relationship with banks operational efficiency as shown by a correlation value of 0.813. form these findings, the study recommended that banks should strategize to increase their core capital as this will avail more funds for lending which is the key banking function. Lending will earn the bank interest hence improve their operational efficiency. Finally, the Treasury and the bank managers should establish a should framework to ensure the commercial banks have enough assets to sail through the unstable economic conditions in the financial sector. The assets will able banks meet their operational cash needs, invest adequately and make profits.