Abstract:
Due to the vast contribution of commercial banks to the economic development in Kenya, this study examined the effect of macroeconomic variables on profitability of Commercial Banks listed at the Nairobi Securities Exchange (NSE) for years 2009 to 2016. The objective was to determine the effect of real Gross Domestic Product on the profitability, examine the effect of interest rate on the profitability, evaluate the effect of inflation rates on the profitability and establish the effect of exchange rate on the profitability. Panel data for the 11 listed banks in the NSE was utilized. Panel data regression analysis with fixed effects was utilized on the data to examine the effects of these four macroeconomic variables which included: Gross Domestic Product (GDP), Real interest rate, Inflation rate and Exchange rate on Return on Asset (ROA) which proxies profitability. The study findings indicated that real GDP growth rate had positive significant effect on profitability of commercial banks as measured through Return on Assets (ROA). Real interest rates had a significant positive influence on profitability of listed commercial banks in Kenya. Inflation rate had a significant positive influence on profitability of listed commercial banks in Kenya. While the exchange rate had a negative significant effect on the profitability of listed commercial banks on Nairobi Securities Exchange. It is therefore recommended that macroeconomic variables should be continuously monitored as they have a significant effect on profitability of commercial banks.
