MANAGERIAL CONTROLLABLE FACTORS AND PROFITABILITY OF COMMERCIAL BANKS IN KENYA
Abstract
Purpose of the Study: This study examined managerial controllable factors influencing profitability of commercial banks in Kenya.
Statement of the Problem: A review of the Central Bank of Kenya published annual reports show that the number of commercial banks making losses or marginal profits is substantial and has actually been going up in the recent past. 8 banks were loss making as at 31st December, 2019 while 17 or 42 percent of the banks in the sector had a marginal return on assets of 1 percent or less. Despite this scenario, there were banks making reasonable returns within the Kenyan banking sector.
Methodology: The population was all the commercial banks operating in Kenya as at December 31, 2019. Secondary data for the period 2010 to 2019 was used in the analysis. This study used descriptive research design and employed balanced panel data. Independent variables were operational efficiency, capital adequacy, branch network, bank size and liquidity while the dependent variable was profitability. The moderating variable was asset quality.
Result: The findings revealed that branch networks, bank size and operational efficiency statistically significantly affected profitability. Operational efficiency was the major endogenous factor affecting bank profitability. Capital adequacy and liquidity had a statistically insignificant effect on profitability. The coefficient of determination R2 was 0.4847 indicating that branch networks, capital adequacy, bank size, operational efficiency and liquidity jointly explained 48.47% of the variation in profitability of commercial banks in Kenya. After moderation, R2 increased significantly to 51.62% which meant that the moderating effect of asset quality was statistically significant.
Conclusion: The study concluded that managerial controllable factors statistically significantly affected bank profitability.
Recommendation: Based on the findings it was recommended that bank managers in Kenya should identify and invest in managerial controllable factors for better profitability.
Keywords: Managerial, Controllable factors, Profitability, Commercial, Bank, branch network capital adequacy, bank size, and operational efficiency.
References
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Bambang, R., & Razimi, S. B. A. (2018). Effect of capital, liquidity, efficiency, performance on profitability in sharia commercial banks in Indonesia. Ikonomika, 3(2), 177-188.
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Dawood, U. (2014). Factors impacting profitability of commercial banks in Pakistan for the period of (2009-2012). International Journal of Scientific and Research Publications, 4(3), 1-7
Demsetz, H. (1973). Industry structure, market rivalry, and public policy. Journal of Law and Economics, 16(1), 1-9
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Lotto, J. (2019). Evaluation of factors influencing bank operating efficiency in Tanzanian banking sector. Journal of Cogent Economics & Finance, 7(1), 1-14.
Maina, G., Kiragu, D., & Kamau, R. G. (2019). Relationship between firm size and profitability of commercial banks in Kenya. International Journal of Economics, Commerce and Management, VII (5), 249-262.
Mensi, S., & Zouari, A. (2010). Efficient structure versus market power: Theories and empirical evidence. International journal of Economics and Finance, 2(4), 151-166.
Muhindi, K. A., & Ngaba, D. (2018). Effect of firm size on financial performance on banks: Case of commercial banks in Kenya. International Academic Journal of Economics and Finance, 3(1), 175-190.
Muriithi, J.M., & Waweru, K.M. (2017). Liquidity risk and financial performance of commercial banks in Kenya. International Journal of Economics and Finance, 9(3), 256-265
Naceur, S.B., & Omran, M. (2008). The effects on bank regulation, competition, and financial reforms on Middle East and North Africa countries banks’ profitability. Economic Research Forum Working Paper No. 44.
Nimalathasan, B. (2008). A comparative study of financial performance of banking sector in Bangladesh – An application of CAMELS rating system. Annals of University of Bucharest, Economic and Administrative Series, 2, 141-152.
Nuhiu, A., Hoti, A., & Bektashi, M. (2017). Determinants of commercial banks profitability through analysis of financial performance indicators: Evidence from Kosovo. Journal of Business: Theory and Practice. 18(2), 160-170.
Nzotta, S. M. (2004). Money, Banking and Finance: Theory and Practice, Revised Edition: Owerri-Hudson Jude, Nigeria Publishers.
Olajide, A.M., & Segun, A. O. (2016). Branch network growth and banks performance in Nigeria (1981-2013). Journal of Finance and Accounting, 7(19), 1-7
Ongore, V., & Kusa, G. (2013). Determinants of financial performance of commercial banks in Kenya. International Journal of Economics and Financial Issues, 3(1), 237–252.
Onuonga, S. M. (2014). The analysis of profitability of Kenya`s top six commercial banks: Internal factor analysis. American International Journal of Social Science, 3(5), 94–103.
Pradhan, S. R., & Gautam, R. Y. (2019). Impact of liquidity management on bank profitability in Nepalese commercial banks. Srusti Management Review, XII (1), 57 – 67
Samad, A. (2015). Determinants of bank profitability: Empirical evidence from Bangladesh commercial banks. International Journal of Financial Research 6(3), 173-179.
Serwadda, I. (2018). Determinants of commercial banks’ profitability. Evidence from Hungary. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 66(5), 1325–1335
Shepherd, W. (1986). The structure-performance relationship. American Economic Review 76(5), 1205-1210.
Tam, L.T., Trang, P.X., & Hanh, L.H. (2017). Determinants of bank profitability: The case of commercial banks listed on the Vietnam’s Stock Exchange. Journal of Business Sciences, 1(2), 1-12.
Tharu, N.K., & Shrestha, Y.M. (2019). The influence of bank size on profitability: an application of statistics. International Journal of Financial, Accounting, and Management, 1(2), 81-89.
Thota, N. (2013). The Determinants of commercial banks profitability in India. SSRN Electronic Journal, https://ssrn.com/abstract=2544838.2020.10.28
Tregenna, F. (2009). The structure and profitability of the US banking sector. Cambridge Journal of Economics, 33 (4), 609–632,
Vong, P. I., & Chan, H. S. (2009). Determinants of bank profitability in Macao. Macau
Wadesango, N., Charity, M., & Shava, F. (2018). Effectiveness of risk management systems on financial performance in a public setting. Academy of Accounting and Financial Studies Journal, 22(4), 1-17.
Alhassan, A.L., & Ohene-Asare, K. (2016). Competition and bank efficiency in emerging markets: empirical evidence from Ghana. African Journal of Economic and Management Studies, 7(2), 268 – 288.
Almaqtari, F. A., Al-Homaidi, E. A., Tabash, M. I., & Farhan, N. H. (2018). The determinants of profitability of Indian commercial banks: A panel data approach. International Journal of Finance & Economics, 24(1), 1–18.
Aman, I., Tariq, W., Usman, M., & Mir, H. Z. (2014). Determinants of commercial banks profitability: Empirical evidence from Pakistan. International Journal of Accounting and Financial Reporting, 4(2), 1-22.
Arafat, M., Warokka, A., & Suherman, N.A. (2013). Banking efficiency and performance: A test of banking characteristics in an emerging market. Journal for Global Business Advancement, 6(1), 13-23
Athanasoglou, P., Brissimis, S. & Delis, M. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions, and Money, 18(2), 121-136.
Bambang, R., & Razimi, S. B. A. (2018). Effect of capital, liquidity, efficiency, performance on profitability in sharia commercial banks in Indonesia. Ikonomika, 3(2), 177-188.
Berger, A. (1995). The Relationship between Capital and Earnings in Banking. Journal of Money, Credit and Banking, 27(2), 432-456.
Berger, A. N., & Hannan, A.N. (1998). The efficiency cost of market power in banking industry: A test of the "Quiet Life" and related hypothesis. Review of Economics and Statistics, 80(3), 454-465
Bryman, A., & Bell, E. (2015). Business Research methods, Oxford: Oxford University Press.
Cooper, D. R., & Schindler, P. S. (2006). Business Research Methods (9th edition). USA: McGraw-Hill.
Dawood, U. (2014). Factors impacting profitability of commercial banks in Pakistan for the period of (2009-2012). International Journal of Scientific and Research Publications, 4(3), 1-7
Demsetz, H. (1973). Industry structure, market rivalry, and public policy. Journal of Law and Economics, 16(1), 1-9
Eljelly, A. (2013). Internal and external determinants of profitability of Islamic banks in Sudan: Evidence from panel data. Afro-Asian Journal of Finance and Accounting, 3(3),222 – 240
Flamini, V., McDonald, C., & Schumacher, L. (2009). Determinants of profitability in Sub-Shaharan Africa. IMF Working Paper 9(15), 1-30.
Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston: Pitman
Friedman, A. L., & Miles, S. (2002). Developing stakeholder theory. Journal of Management Studies, 39(1), 1-21
Garza-Garcia, J. G. (2012). Does market power influence bank profits in Mexico. A study on market power and efficiency. Applied Financial Economics, 22(1), 21-32.
Girardone, C., Molyneux, P., & Gardener, E.P.M. (2004). Analyzing the determinants of bank efficiency: The case of Italian banks. Journal of Applied Economics. 3(6), 215-227
Hicks, J.R. (1935). Annual Survey of Economic Theory: The Theory of Monopoly. Econometrica Journal, 3 (1), 1-20
Imad, Z. R., Qais, A. K., & Thair, A. K. (2011). Determinants of bank profitability: Evidence from Jordan. International Journal of Academic Research. 3(4), 180-191
Jureviciene, D., & Skvarciany, V. (2013). The Concept of confidence in bank. In T. Loster, & T. Pavelka (Eds.), 7th International days of statistics and economics (pp. 532-540). Melandrium.
Kadioglu, E., Telceken, N., & Ocal, N. (2017). Effect of the asset quality on the bank profitability. International Journal of Economics and Finance, 9(7), 60-68.
Kalirajan, K.P., & Shand, R. T. (1999). Frontier production functions and technical efficiency measures. Journal of Economic Surveys, 13(2), 149-172.
Kawshala, H., & Panditharathna, K. (2017). The factors affecting on bank profitability. International Journal of Scientific and Research Publications, 7(2), 212-216.
Kim, D., & Sohn, W. (2017). The effect of bank capital on lending: Does liquidity matter? Journal of Banking and Finance, 77, 95–107.
Kosmidou, K., Tanna, S., & Pasiouras, F. (2008). Determinants of profitability of domestic UK commercial banks: Panel evidence from the period 1995-2002. Economics, finance and accounting applied research working paper series RP08- (4), 1-27. Coventry: Coventry University.
Kozaric, K., Dzelihodzic, E.Z. (2020). Effects of macroeconomic environment on non-performing loans and financial stability. Case of Bosnia and Herzegovina. Journal of Central Banking Theory and Practice, 2020(2), 5-17.
Lotto, J. (2019). Evaluation of factors influencing bank operating efficiency in Tanzanian banking sector. Journal of Cogent Economics & Finance, 7(1), 1-14.
Maina, G., Kiragu, D., & Kamau, R. G. (2019). Relationship between firm size and profitability of commercial banks in Kenya. International Journal of Economics, Commerce and Management, VII (5), 249-262.
Mensi, S., & Zouari, A. (2010). Efficient structure versus market power: Theories and empirical evidence. International journal of Economics and Finance, 2(4), 151-166.
Muhindi, K. A., & Ngaba, D. (2018). Effect of firm size on financial performance on banks: Case of commercial banks in Kenya. International Academic Journal of Economics and Finance, 3(1), 175-190.
Muriithi, J.M., & Waweru, K.M. (2017). Liquidity risk and financial performance of commercial banks in Kenya. International Journal of Economics and Finance, 9(3), 256-265
Naceur, S.B., & Omran, M. (2008). The effects on bank regulation, competition, and financial reforms on Middle East and North Africa countries banks’ profitability. Economic Research Forum Working Paper No. 44.
Nimalathasan, B. (2008). A comparative study of financial performance of banking sector in Bangladesh – An application of CAMELS rating system. Annals of University of Bucharest, Economic and Administrative Series, 2, 141-152.
Nuhiu, A., Hoti, A., & Bektashi, M. (2017). Determinants of commercial banks profitability through analysis of financial performance indicators: Evidence from Kosovo. Journal of Business: Theory and Practice. 18(2), 160-170.
Nzotta, S. M. (2004). Money, Banking and Finance: Theory and Practice, Revised Edition: Owerri-Hudson Jude, Nigeria Publishers.
Olajide, A.M., & Segun, A. O. (2016). Branch network growth and banks performance in Nigeria (1981-2013). Journal of Finance and Accounting, 7(19), 1-7
Ongore, V., & Kusa, G. (2013). Determinants of financial performance of commercial banks in Kenya. International Journal of Economics and Financial Issues, 3(1), 237–252.
Onuonga, S. M. (2014). The analysis of profitability of Kenya`s top six commercial banks: Internal factor analysis. American International Journal of Social Science, 3(5), 94–103.
Pradhan, S. R., & Gautam, R. Y. (2019). Impact of liquidity management on bank profitability in Nepalese commercial banks. Srusti Management Review, XII (1), 57 – 67
Samad, A. (2015). Determinants of bank profitability: Empirical evidence from Bangladesh commercial banks. International Journal of Financial Research 6(3), 173-179.
Serwadda, I. (2018). Determinants of commercial banks’ profitability. Evidence from Hungary. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 66(5), 1325–1335
Shepherd, W. (1986). The structure-performance relationship. American Economic Review 76(5), 1205-1210.
Tam, L.T., Trang, P.X., & Hanh, L.H. (2017). Determinants of bank profitability: The case of commercial banks listed on the Vietnam’s Stock Exchange. Journal of Business Sciences, 1(2), 1-12.
Tharu, N.K., & Shrestha, Y.M. (2019). The influence of bank size on profitability: an application of statistics. International Journal of Financial, Accounting, and Management, 1(2), 81-89.
Thota, N. (2013). The Determinants of commercial banks profitability in India. SSRN Electronic Journal, https://ssrn.com/abstract=2544838.2020.10.28
Tregenna, F. (2009). The structure and profitability of the US banking sector. Cambridge Journal of Economics, 33 (4), 609–632,
Vong, P. I., & Chan, H. S. (2009). Determinants of bank profitability in Macao. Macau
Wadesango, N., Charity, M., & Shava, F. (2018). Effectiveness of risk management systems on financial performance in a public setting. Academy of Accounting and Financial Studies Journal, 22(4), 1-17.
Published
2021-08-11
How to Cite
Momanyi, B., Githui , T., & Omurwa, J. (2021). MANAGERIAL CONTROLLABLE FACTORS AND PROFITABILITY OF COMMERCIAL BANKS IN KENYA. African Journal of Emerging Issues, 3(5), 16-39. Retrieved from https://ajoeijournals.org/sys/index.php/ajoei/article/view/197
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