Strategies Adopted By Commercial Banks In Kenya To Enhance Financial Performance

Abstract

The purpose of the study was to examine the strategies applied by commercial banks in Kenya to improve financial performance. This study was informed by interest rate capping which necessitates commercial banks to seek other revenue sources and engage in lean and efficient credit risk management. Specific objectives of the research study were to investigate the influence of administration cost-concentration, credit policies, non-interest income and asset quality on financial performance of commercial banks in Kenya. This research study was based on the effectiveness hypothesis, arbitrage pricing theory, financial leverage model and the symmetric information theory. The researcher used descriptive research methodology. The 42 operational commercial banks in Kenya formed the population of interest in this research study. Data for five years (2013 – 2017) was collected from the audited financial reports of these commercial banks. Secondary data that was utilized to achieve the study objectives was sourced from the Central Bank of Kenya bank supervision reports, the audited financial statements of the commercial banks and the websites of the commercial banks. This research study utilized panel data analysis where information for each of the 42 commercial banks on ROA, administration costs concentration, credit policies, non-interest income, asset quality and bank size was gathered for five years. Stata statistical software was utilized for analysis. Presentation of data from the panel regression analysis was through tables and figures. Study findings show that administration cost-concentration had a significant positive effect on financial performance of commercial banks in Kenya (β= 0.4153; p < 0.05). Credit policies had a negative but insignificant effect on financial performance of commercial banks in Kenya (β= -0.1872; p > 0.05). Non-interest income had a significant positive effect on financial performance of commercial banks in Kenya (β= 0.1292; p < 0.05). Asset quality had a significant negative effect on financial performance of commercial banks in Kenya (β= -0.9979; p < 0.05). From the study results, the study recommends the following. On administration costs concentration, commercial banks should seek to enhance their efficiency by leveraging on technology and reducing their operations costs. Commercial banks should tighten their credit policies to ensure that only clients with riskiness that is covered by the capped interest rates access loan products from the commercial banks. Commercial banks should seek to perform other intermediation roles to diversify their revenue sources so that they do not rely heavily on the ever-reducing interest income. Lastly, management in commercial banks should be effective in controlling and monitoring credit risk to achieve a higher credit rating.