Determinants Of Financial Performance Among Second Tier Commercial Banks In Kenya

Abstract

The main objective of this research was to assess the determinants of financial performance among the second-tier commercial banks in Kenya. The Profitability of commercial banks and their performance has become an important topic of research. However, it is difficult for the management and shareholders to find the right measure to evaluate their banks given the availability of many variables that have been utilized by various scholars to pinpoint factors influencing the financial performance of banks. This dilemma leaves researchers without a satisfactory position and opens up a gap for further analysis of the financial performance among the second-tier commercial banks. The research objectives were asset quality, leverage, capital adequacy and liquidity. The study was guided by the trade-off theory, agency theory, modern portfolio theory and the efficient market hypothesis theory through the theoretical review, empirical review and conceptual framework. Descriptive research design was used to target all the 10 second tier commercial banks in Kenya. Secondary data on the identified inquiry variables were collected for five years between 2014 to 2018. Data from all the 10 second tier commercial banks in Kenya were analysed using STATA on the panel data regression model. Housman test was done to determine which panel regression model was appropriate for the study. Diagnostics tests conducted were multicollinearity, autocorrelation heteroscedasticity and normality for the residuals. The findings were exhibited in a tabular form. The study findings showed that leverage and capital adequacy had a significant negative effect on the financial performance of the banks. However, asset quality has a positive insignificant effect while Liquidity had a negative insignificant effect on return on equity. The study recommends that policymakers should ensure that they adhere to the financial safety net by limiting moral hazard risk and limiting bank failures. The second tier Commercial banks can still increase their debt-to-equity ratio so as to have more capital reserves to survive a financial crisis. The study further recommends for an increase in capital adequacy ratio in all the second-tier commercial banks in Kenya to boost their stability and save them from financial stress and also ensure they maintain adequate capital to cushions the banks about any potential losses hence protecting the interest of bank’s depositors and other lenders and this will enhance financial performance among second tier commercial banks.