ASSESSMENT OF THE EFFECT OF GDP ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA
Abstract
Purpose of Study: This study therefore sought to assess the effect of GDD on financial performance of commercial banks in Kenya.
Problem Statement: Over the past decade, the Return on Assets (ROA) for Kenyan banks has shown fluctuation, ranging from 13.3% to 22.4% (KBA, Kenya Bankers Association, 2023). Despite this, Kenya's credit penetration rate remains relatively low, indicating potential inefficiencies or constraints within the banking sector. GDP is a critical determinant of the economic environment, influencing the ability of commercial banks to thrive.
Methodology: The economic theory provided the theoretical foundation of the study. A causal research design based on panel data approach was adopted in the study. The study used secondary data which was obtained from 37 commercial banks for the period covering 2013 through 2022. Data was sourced from The Kenya National Bureau of Statistics, the Central Bank of Kenya, and audited financial statements of the commercial banks considered in this study. Data analysis involved both descriptive and inferential statistics where the former constituted of the mean and standard deviation while the latter comprised of panel regression.
Result: The findings revealed that GDP had a positive and statistically significant effect on financial performance as measured using ROA (r=.147; p=.048; p<.05) The study recommends that commercial banks should leverage interest rate increases to boost profitability through strategic adjustment of loan and deposit rates to maximize interest income.
Conclusion: The study concluded that GDP growth positively and significantly affected the return on assets of commercial banks.
Recommendation: Commercial banks should take advantage of periods of GDP growth to expand their lending activities, particularly to sectors that drive economic growth.
Keywords: GDP, Financial Performance, Economic Growth, Commercial Banks, Kenya.
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