Effect Of Internal Organizational Factors On Performance Of Commercial Banks In Kenya

Abstract

Globally and in Kenya, commercial banks play an important role in economic stimulus of the economy as well distribution of growth. Banks channels funds from depositors to investors hence linking economic players of the nation. For this reason, studies seeking to improve commercial banks performance have increased tremendously. However, there is a dearth of studies on the effect of liquidity, capital, costs and operational efficiency on commercial banks’ financial performance. This study therefore sought to fill this gap by determining how liquidity management, capital strength, operational efficiency and cost affect commercial banks performance in Kenya. The main objective of this study was to determine the effects of the selected internal factors on performance of commercial banks in Kenya. Specifically the study sought to determine effect of liquidity management, capital strength, operational efficiency and cost on performance of commercial banks in Kenya. The study was based on the neo-classical and efficient structure theories. Descriptive research design was applied in the study. Target population was 42 commercial banks in Kenya. Secondary data was collected for the 42 banks for five years (2010 – 2014). Fixed effects panel regression model and correlation analysis were used in analysis. The findings are expected to inform policy and practice in bank management. The study findings indicate that efficiency and capital adequacy has a significant positive effect on bank profitability while liquidity has a negative effect on profitability. Operating costs have no significant effect on profitability. The study recommends a well-defined policy framework for the management of capital adequacy requirements as banks would be more profitable if they increase their core capital. Further, the study recommends to managers to stabilize their liquidity just above the required legal limit. Lastly, the study recommends banks to optimize their use of resources to ensure that they efficiently utilize their resources and are less wasteful.