Influence Of Financial Services On Financial Performance Of Tier Two Banks In Kenya

Abstract

This study examined the influence of financial services on performance of tier two banks in Kenya. The Kenyan banking sector is divided into three tiers; tier one consists of six large banks with about half of the total markets share, tier two banks which are fourteen medium sized banks and tier three banks which have the smallest market share. Financial information from fourteen tier 2 banks, covering five years from 2014 to 2018 were collected from the banking institutions website and the Central Bank of Kenya annual supervision reports. Descriptive statistics was applied on the performance indicators return on assets, ratio of total savings, total loans and total costs of financial training to the net income. The target population in this study was the Tier II banks incorporated in Kenya. According to the CBK Annual Report (2018), there are Fourteen Tier II banks in Kenya. Due to the small population size, n < 100, a census study was done for all the five years and analyzed using STATA software. Panel data estimation models include; pooled ordinary least square (OLS), fixed effects model (FEM) and random effects model (REM). Breusch-Pagan Lagrange multiplier (LM) test was used to decide whether fixed effect or random effects model was appropriate for data analysis. The Hausman test showed that the best model for the study was the random effects regression model. Regression using panel data Random Effect (RE) Model was applied. The study found that the means of the EPS, savings service, loan services and financial training were 79.58, 27.96, 32.34 and 0.11 respectively. Savings services and loans services were found to be statistically significant, while Financial Training was not statistically significant. The adjusted R square value was 0.1825, an indication that there was variation of 0.1825 on influence of financial performance of Tier II banks in Kenya due to changes in saving services, loan services and financial training at 95% confidence interval. This shows that approximately only 18.25% of the changes of financial performance of tier two banks could be explained for by changes in the study variables and thus the predictor variables in this study do not have a substantial influence on the performance of Tier II banks in Kenya. The findings of the study are that savings services and loans services have a negative effect on financial performance and financial training posted a significant positive impact on the financial performance of Tier II banks.