LIQUIDITY RISK AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS

IN KENYA

BY

STELLA KEMUNTO RATEMO

D53/OL/CTY/32639/2016

A PROJECT PRESENTED TO THE SCHOOL OF BUSINESS IN PARTIAL

FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE
OF MASTER OF BUSINESS ADMINISTRATION (FINANCE OPTION) OF
KENYATTA UNIVERSITY

JUNE, 2021
 DECLARATION

Declaration

I solemnly declare that the research work presented herein and has not been presented in any

institution of higher learning for any award or examination. It is only in the author’s permission

or of Kenyatta University that any content of this work can be reproduced

Signature...................................................... Date..................................................

STELLA KEMUNTO RATEMO

D53/OL/CTY/32639/2016

I confirm that this project has been carried out under my guidance as the University supervisor.

Signature...................................................... Date..................................................

DR. F.W.S NDEDE

Department of Accounting and Finance

School of Business, Kenyatta University

ii
 DEDICATION

Dedicated to my beloved husband Mr. Bernard Mireri, daughter Bennita Blondy Nyaranda and

son Asher Nate Mireri for their encouragement and support. I also dedicate this project to my

parents, Mrs. Teresia Ratemo and Mr. Wilfred Ratemo for their hard work and persistence.

May God in Heaven bless you.

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 ACKNOWLEDGEMENT

I sincerely acknowledge the hand of God, His blessings and grace in keeping me alive. His

grace has brought me this far. I also recognize the effort put by Dr. Fredrick Ndede as my

supervisor in making sure that I excel academically. His guidance and corrections made me a

better person.

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 TABLE OF CONTENTS

ACKNOWLEDGEMENT ...................................................................................................... iv

TABLE OF CONTENTS ........................................................................................................ v

LIST OF TABLES .................................................................................................................. ix

LIST OF FIGURES ................................................................................................................. x

OPERATIONAL DEFINITION OF TERMS ...................................................................... xi

ABBREVIATIONS AND ACRONYMS ..............................................................................xii

ABSTRACT .......................................................................................................................... xiii

CHAPTER ONE: INTRODUCTION .................................................................................... 1

1.1 Background to the Study .................................................................................................. 1

1.1.1 Liquidity Risk Factors ............................................................................................... 2

1.1.2 Performance of Commercial Banks........................................................................... 3

1.1.3 Commercial Banks in Kenya ..................................................................................... 4

1.2 Statement of the Problem ................................................................................................. 5

1.3 Objectives ......................................................................................................................... 6

1.3.1 General Objective ...................................................................................................... 6

1.4 Specific Objectives ........................................................................................................... 7

1.4.1 Research Hypotheses ................................................................................................. 7

1.5 Significance of the Study ................................................................................................. 8

1.6 Scope of the Study............................................................................................................ 8

1.7 Organization of the Study ................................................................................................ 8

CHAPTER TWO: LITERATURE REVIEW ..................................................................... 10

2.1 Introduction ...................................................................................................................... 9

2.2 Theoretical Literature Review ........................................................................................ 10

2.2.1 Financial Intermediation Theory ............................................................................. 10

2.2.2 Liquidity Preference Theory.................................................................................... 11

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 2.2.3 Risk Theory ............................................................................................................. 12

2.2.4 Theory of the Firm................................................................................................... 12

2.3 Empirical Literature Review .......................................................................................... 13

2.3.1 Asset Quality and Financial Performance ............................................................... 13

2.3.2 Bank Size and Financial Performance ..................................................................... 14

2.3.3 Capital Adequacy and Financial Performance ........................................................ 15

2.3.4 Operational Efficiency and Financial Performance ................................................ 16

2.3.5 Money Supply, liquidity risk and financial performance ........................................ 17

2.4 Literature Review Summary and Knowledge Gaps ....................................................... 18

2.5 Conceptual Framework .................................................................................................. 19

Figure 2.1: Conceptual Framework .................................................................................. 20

CHAPTER THREE: RESEARCH METHODOLOGY .................................................... 21

3.1 Introduction .................................................................................................................... 21

3.2 Research Design ............................................................................................................. 21

3.3 Empirical Model ............................................................................................................. 21

3.4 Operationalization and measurement of Variables ........................................................ 23

3.5 Target Population ........................................................................................................... 23

3.6 Sample size and sampling design ................................................................................... 23

3.7 Data Collection Instrument and Procedure .................................................................... 24

3.8 Data Analysis ................................................................................................................. 24

3.9 Diagnostic Tests ............................................................................................................. 24

3.9.1 Serial correlation ..................................................................................................... 25

3.9.2 Heteroscedasticity.................................................................................................... 25

3.9.3 Unit root test ............................................................................................................ 25

3.9.4 Hausman Test .......................................................................................................... 26

3.9.5 Normality Tests ....................................................................................................... 26

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 3.9.6 Multicollinearity ...................................................................................................... 26

3.10 Ethical Issues ................................................................................................................ 27

CHAPTER FOUR: DATA ANALYSIS, PRESENTATION AND INTERPRETATION

.................................................................................................................................................. 28

4.1 Introduction .................................................................................................................... 28

4.2 Descriptive analysis........................................................................................................ 28

4.3 Trend analysis ................................................................................................................ 31

4.3.1 Asset quality ............................................................................................................ 31

4.3.2 Bank size ................................................................................................................. 32

4.3.3 Capital adequacy ..................................................................................................... 33

4.3.4 Operational efficiency ............................................................................................. 35

4.3.5 ROE ......................................................................................................................... 36

4.4 Inferential Results .......................................................................................................... 36

4.4.1 Correlation Analysis ................................................................................................ 37

4.5 Diagnostic Tests ............................................................................................................. 39

4.5.1 Autocorrelation Test ................................................................................................ 40

4.5.2 Heteroscedasticity Test ............................................................................................ 40

4.5.3 Unit Root test........................................................................................................... 40

4.5.4 Hausman Test .......................................................................................................... 42

4.5.5 Normality Test ......................................................................................................... 43

4.5.6 Multicollinearity Test .............................................................................................. 43

4.6 Panel Regression Results ............................................................................................... 44

4.6.1 Impact of Money Supply as moderator on the relationship between liquidity risk and
financial performance of commercial banks .................................................................... 50

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION ........... 52

5.1 Introduction .................................................................................................................... 52

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 5.2 Summary of Findings ..................................................................................................... 52

5.3 Conclusions .................................................................................................................... 54

5.4 Contribution to body of Knowledge............................................................................... 55

5.5 Recommendations .......................................................................................................... 55

5.5.1 Recommendations for policy ................................................................................... 56

5.5.2 Recommendations for practice ................................................................................ 57

5.5.3 Limitations of the study and Areas for further Research ........................................ 58

5.5.3.1 Limitations of the Study ........................................................................................... 58

5.5.3.2 Areas for further research ......................................................................................... 58

REFERENCES ....................................................................................................................... 59

APPENDIX II: DATA COLLECTION SHEETS .............................................................. 67

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 LIST OF TABLES

Table 2.1: Knowledge Gaps ..................................................................................................... 18

Table 3.1: Operationalization and measurement of Variables ................................................. 23

Table 4.1: Descriptive Results ................................................................................................. 28

Table 4.2: Correlation Matrix .................................................................................................. 37

Table 4.3: Breusch-Godfrey Autocorrelation Test: ................................................................. 40

Table 4.4: Heteroskedasticity output ....................................................................................... 40

Table 4.5: Unit Root Test......................................................................................................... 41

Table 4.6: Hausman Random Test for Random and Fixed Effects ......................................... 42

Table 4.7: Normality Test ........................................................................................................ 43

Table 4.8: Multicollinearity Test ............................................................................................. 44

Table 4.9: Panel Regression Results ........................................................................................ 44

Table 4.10: Moderating effect of Money Supply..................................................................... 50

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 LIST OF FIGURES

Figure 4.1: Asset quality .......................................................................................................... 32

Figure 4.2: Bank size ............................................................................................................... 33

Figure 4.3: Capital adequacy ................................................................................................... 34

Figure 4.4: Operational efficiency ........................................................................................... 35

Figure 4.5: Return on equity .................................................................................................... 36

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 OPERATIONAL DEFINITION OF TERMS

Asset Quality Refers to the ratio of loans awarded but did not perform as

expected and is measured as Non-Performing Loans divided by

totals advanced of the commercial bank.

Bank Size Describes the size of a commercial bank it terms of assets it owns

Capital Adequacy Connotes the amount of capital held by commercial banks to

offset liquidity risks in times of uncertainty.

Financial Performance Describes the manner in which a bank uses its resources to

generate profit for stakeholders.

Liquidity Refers to short term liquid assets used to support operations of a

bank and often in terms of cash.

Liquidity risk Refers to the situation where a bank is holding less liquid assets

that are not enough to support its operations in time of need. It is

also affected by operational efficiency, size of the bank, capital

adequacy and asset quality.

Operational Efficiency Highlights the efficiency of the bank in using its resources to

generate profit against total operational costs.

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 ABBREVIATIONS AND ACRONYMS

AQ Asset Quality

CA Capital Adequacy

CAR Capital Adequacy Ratio

CBK Central Bank of Kenya

GDP Gross Domestic Product

MC Marginal Cost

MR Marginal Revenue

NACOSTI National Council of Science and technology

NPL Non-performing Loans

ROA Return on Assets

ROE Return on Equity

xii
 ABSTRACT

Commercial banks are essential entities in providing financial services among people,
governments and business entities. Commercial banks contribute to the economy of the country
via the tax revenue it remits to the government. The incapability of commercial banks to hold
the right balance of the liquid assets for effective and efficient operations threatens their
financial performance. Global financial crisis of the year 2007-2008 was a depiction of the
importance of liquidity. Liquidity risks arise from failure to balance cash inflows against cash
outflows. However, commercial banks fall short of the liquidity money to support their
operations and also to lend to prospective borrowers undermining their financial performance.
This study investigates how liquidity risks influence financial performance of commercial
banks, guided by specific objectives that include; effect of bank size, asset quality, operational
efficiency and capital adequacy on financial performance commercial banks. The effect of
money supply on the relationship between liquidity risks and financial performance of
commercial banks was also determined. Causal research design was adopted in this study
targeting 42 commercial banks operating in Kenya. Secondary data were employed in this
study. The secondary data were extracted from financial books from individual commercial
banks and CBK reports. Data analysis was undertaken by use of Stata 14.0 where descriptive
results and panel models were generated. Results revealed that the coefficient of bank size
positively and significantly affects financial performance of commercial banks. It was also
found that the coefficient of asset quality is negatively and significantly affects commercial
banks’ financial performance whereas capital adequacy positively but insignificantly affects
commercial banks’ financial performance. Coefficient of operational efficiency of the bank
was positively and significantly related commercial banks’ financial performance. Money
supply moderates the relationship between liquidity risks and performance of commercial
banks since the coefficient of determination rose. One key recommendation is that commercial
banks may need to consider diversifying their product portfolio with aiming of expanding their
income revenue. Commercial banks may need to review their credit evaluation methods to
ensure that only worthy borrowers borrow their funds with aim of reducing high cases of
nonperforming loans. Award of loans should go hand in hand with some form of financial
training, guidance ad advice for borrowers on how to allocate the funds borrowed. Adequate
capital needs to be held by commercial banks as stipulated by banks operational regulations.
There is need to improve capacity development among bank employees with aim of enhancing
operational efficiency in the bank.

xiii
 CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Banking sector facilitates financial intermediation among people, business and governments.

Commercial banks have been in the front line of driving Kenya’s economy (Sindani &

Buchichi, 2013). However, periodic financial distress, undermines the financial sustainability

and performance of banks. In the event the commercial banks are not performing well, access

to financial services among people, business enterprises’ and governments become a challenge

(Adeyinka, et al., 2018). For instance, commercial banks aggregate earning using Return on

Equity (ROE) was 21.99% in 2016 but declined to 23.10 in the year 2017.

The decline in profitability of Kenyan commercial banks was also witnessed in the years 2013,

2014 and 2015 where ROE was 20.94%, 20.88% and 17.38 respectively (CBK, 2020).

Likewise, in the year 2018, major tier 1 banks witnessed sharp decline in their profits with

combine ROE of 17.03%. Consistent underperformance of commercial banks scares away

investors who resort to withdraw their money for fear of losing them (Kiemo, et al., 2019).

Several commercial banks have collapsed in Kenya a phenomenon that has been attributed to

liquidity problems. The collapse of Imperial and Chase Bank were attributed to liquidity

problems (CBK, 2017).

Liquidity risks describe the level of safety in terms of liquid assets a bank holds for its day to

day commercial and financial operations (Bertham, 2011). The management of liquidity money

by banks thus determines the level at which a commercial bank can operate sufficiently without

going short of liquid money (Tran, et al., 2019). Liquidity risk thus connoted the ability of a

commercial bank to finance its asset at a given point in time without risking incurring additional

expenses that threaten its sustainability. Liquidity risk management remains a core task among

1
commercial banks particularly when converting short term deposits to long term loans (Alali,

2019). Liquidity risks need to be carefully monitored as part of the wider financial risk

management by paying close attention to market and credit risks. Despite the significant

function of liquidity, many commercial banks have found themselves struggling to keep afloat

threatening their financial performance, though this is yet to be proved empirically in the

Kenyan context.

1.1.1 Liquidity Risk Factors

Liquidity defines bank’s ability to meet its financial obligation of sustaining its operations.

Liquidity risks emanates from the act where there are small financial inflows and large fund

outflow at the bank (Chen, Shen, Kao & Yeh, 2018). The result of this phenomenon is fund

deficit by the commercial bank rendering it unable to advance loans to loan seekers or unable

to meet their business operations.

Liquidity risks seriously undermine commercial bank’s ability to grow. Adequate liquidity

buffers a bank during time of financial distress. Optimal liquidity stimulates financial

performance of bank; however, too much liquidity may be hindrance to bank’s profitability

(Arif & Anees, 2012). It is evidently clear that a commercial bank needs to balance between

short term assets and long term debts. Short term assets are easily convertible to liquid assets

in the event a bank falls short of operational finances (Galletta & Mazzù, 2019). The liquidity

risk elements include asset quality, bank size, operational efficiency and capital adequacy.

Bank size is a measure of the total assets it controls. A large bank can take the advantage of

economies of scale to generate more profits for itself (Terraza, 2015). Asset quality entails the

assessment of bank’s assets with aiming of understanding the risks each asset possesses.

Conducting asset quality enables the bank to make an inventory of all the risks attached to the

2
assets (Nomran, Haron & Hassan, 2017). This act allows the bank to segregate customers based

in their ability to repay loans.

Capital Adequacy connotes the amount of capital held by banks to offset liquidity risks in times

of uncertainty. Capital adequacy act as a safety net of protecting depositors in case the bank

collapses or goes out of the market. According to Antoun, Coskun and Georgiezski (2018)

capital adequacy expresses the ability of the bank to manage liquidity risks and make prudent

financial decisions regarding bank’s liquidity position during financial crisis. Operational

efficiency on the other hand describes bank’s proficiency in running the business with goal of

making sure that financial services and products are available to customers (Umoru &

Osemwegie, 2016). Work ethics of the bank, the staff and management determines the level of

operational efficiency in the bank.

1.1.2 Performance of Commercial Banks

Global economy and individual country’s economy is dependent on the prosperity and growth

of the financial sector (Pavithran & Raihanath, 2014). Commercial banks have the role of

providing financial services to people, businesses firms, organizations, institutions and

governments (Rifat, Nisha, Iqbal & Suviitawat, 2016). Commercial banks act as intermediaries

for those seeking financial services.

Core functions of commercial banks include deposit services, saving savings and withdrawal

services. They also act as store of money where those seeking loans can be given at a fee,

normally called interest rates (Sembiyeva, Zhagyparova & Makysh, 2019). In addition,

commercial banks are source of job opportunities for millions of people across the globe.

Commercial banks are often regulated by countries supreme or central or federal bank that

makes sure that that commercial banks operate within the regulation and guidelines set (Nkuna,

et al., 2018). Commercial banks can be publicly managed, privately owned or foreign owned.

3
One of fundamental function of commercial banks is the financial intermediation. It plays the

role of connecting people, enterprises and organization with financial service provider (Lu &

Hu, 2014). Commercial banks engage in lending funds to business enterprises and personal

loans. Saving services are also facilitated by commercial banks. In addition, commercial banks

undertake credit scrutiny of potent borrowers before awarding loans. According to Trabelsi

(2015), the distribution of funds from lenders to borrowers is made possible by commercial

banks by acting. The information asymmetry between those who have funds in plenty ad those

who are in deficit or need more funds is broken down by commercial banks who act as

intermediaries (Nawabzada, 2017). More so, access to credit facilities by small and medium

enterprises has been made possible by commercial banks. Thus, commercial banks are actively

involved in spurring economic growth.

1.1.3 Commercial Banks in Kenya

Commercial banks in Kenya play the role of connecting borrowers and lenders. It also plays the

role of holding money on behalf of depositors and creating financial platform to support savings.

There are 43 commercial banks in Kenya according to 2019 Central Bank of Kenya (CBK) report

where 29 are domestic while 14 are foreign owned. Central Bank of Kenya is the supreme bank

with the mandate of formulating and implementing fiscal policies in Kenya while regulating

commercial banks operations. The regulating functions of the CBK include stating the minimal

capital requirements before an entry is registered to offer banking or financial services.

Each and every commercial bank in Kenya has the function of ensuring that the bank holds the

acceptable amount of liquid assets by balancing total liquid assets and total short term liabilities.

In Kenya, liquidity ratio in the banking sector averaged 48.6% in 2018. In 2017, liquidity state of

commercial banks in Kenya was 43.7. According to CBK, statutory requirement, a bank must hold

at least 20% of its assets in liquid. Liquid assets held by commercial banks allow the banks to

4
fund their operations and other obligation during financial distress. Liquidity problems can

degenerate into solvency problems among commercial banks if liquidity is not handled properly.

1.2 Statement of the Problem

The decline in profitability of Kenyan commercial banks was a witnessed in the years 2013,

2014 and 2015 where ROE was 20.94%, 20.88% and 17.38 respectively. Likewise, in the year

2018, major tier 1 banks witnessed sharp decline in their profits with combine ROE of 17.03%

(CBK, 2020). Likewise, there tier 1 commercial banks in Kenya registered sharp decline in

their profitability in 2017. Cooperative Bank of Kenya reported a decline in its profitability in

the middle year financial report of 2017 where the net income after tax declined by 10.4% to

Ksh. 6.64 billion (CBK, 2020). There was also a decline of 10.3% in the total interest income,

a representation of Ksh.19.26 and a drop in net interest income by 7.2%, equivalent to Ksh.

13.4% (Cooperative Bank of Kenya, 2017). Moreover, several commercial banks have

collapsed in Kenya a phenomenon that has been attributed to liquidity problems. The collapse

of Imperial and Chase Bank were attributed to liquidity problems (CBK, 2017).

The incapability of commercial banks to hold the right balance of the liquid assets for effective

and efficient operations threatens their financial performance. Global financial crisis of the year

2007-2008 was a depiction of the importance of liquidity (Vodova, 2013). Liquidity risks arise

from failure to balance cash inflows against cash outflows. This phenomenon may put

commercial bank in financial distress in case of shortage of liquid assets to meet their short

term debt obligation or too much liquid assets that may suffer devaluation in case of rising

inflation (Galletta & Mazzù, 2019). It is thus important to closely monitor the liquidity level of

a commercial bank through effective and efficient liquidity risk monitoring techniques.

Declining profitability of commercial banks is a significant threat to the economy. Consistent

underperformance of commercial banks scares away investors who resort to withdraw their

5
money for fear of losing them. In Kenya and elsewhere, commercial banks are significant

economic. The collapse of commercial banks because of declining profits is a significant threat

to the economy and financial sector since commercial banks are major players in the financial

sector. Thus, the adverse impacts of liquidity risks on financial performance of commercial

banks are an important financial area for consideration. Nevertheless, scholarly work on

liquidity risks and commercial bank performance fails to clearly highlight the role of liquidity

in the banking sector (Jha & Hui, 2012; Kamande, 2017; Liu, 2011, Ezra, 2013).

Several knowledge gaps are evident in literature regarding liquidity risk and bank performance.

As study Buyinza (2010), profitability of commercial banks in SSA countries contrasting

current study that focuses only Kenyan commercial banks presenting contextual gap. Jha and

Hui (2012) studied how financial characteristics impacts performance of Nepalese commercial

banks contrasting current study that targeted Kenyan commercial banks presenting contextual

gap. In SSA, Ezra (2013) investigated the determinants of the profitability of commercial

banks. This was a cross country study contrasting current study that focus on only one country

with aiming of producing specific results for on particular country presenting both contextual

and conceptual gap. A study by Kamande (2017) on how bank specific factors impacts Kenyan

commercial banks’ financial performance measured using ROA. Current study attempts to

measure bank performance using ROE presenting conceptual gap. This study determined how

liquidity risks affect financial performance of Kenyan commercial banks.

1.3 Objectives of the study

1.3.1 General Objective

General Objective of the study was to determine the effect of liquidity risks factors on financial

performance of commercial banks in Kenya.

6
1.4 Specific Objectives

The following specific objectives which guided the study included:

i. To investigate the effect of asset quality on financial performance of commercial banks

in Kenya.

ii. To establish the effect of bank size on financial performance of commercial banks in

Kenya.

iii. To determine the effect of capital adequacy on financial performance of commercial

banks in Kenya.

iv. To analyze the effect of operational efficiency on financial performance of commercial

banks in Kenya.

v. To determine the moderating effect of money supply on the relationship between

liquidity risk factors and financial performance of commercial banks in Kenya.

1.4.1 Research Hypotheses

The hypotheses tested in this study included:

H01: Asset quality has no significant effect on financial performance of commercial banks

in Kenya.

H02: Bank size has no significant effect on financial performance of commercial banks in

Kenya.

H03: Capital adequacy has no significant effect on financial performance of commercial

banks in Kenya.

H04: Operational efficiency has no significant effect on financial performance of

commercial banks in Kenya.

7
 H05: Money supply does not significantly moderate the relationship between liquidity risk

and financial performance of commercial banks in Kenya.

1.5 Significance of the Study

The results of this study of value to bank management, policymakers and future researchers.

First, prudent financial risk monitoring is essential to the operations of a commercial bank. The

results and recommendations from this study may enable commercial to select the most suitable

liquidity risk management techniques that best suits their banks.

Second, policymakers particularly the Central Bank of Kenya may time to time revise their

policy stand on liquidity management by commercial banks. Central Bank of Kenya can advise

commercial banks accordingly on prudent liquidity risk management.

Third, the results of this study form important source of reference for future studies on liquidity

risks. Future research on liquidity risks may be informative to liquidity risk management

theories.

1.6 Scope of the Study

Form conceptual scope, this study investigated how liquidity risk factors that includes

operational efficiency, asset quality, bank size and capital adequacy affect profitability of

commercial banks. In terms of contextual scope, 42 commercial banks operating in Kenya were

studied. The period of study was 2012-2017 presenting time scope where panel data analysis

model was adopted.

1.7 Organization of the Study

This study is organized into five chapters. Chapter one highlights the introduction of the study,

problem statement, objectives, specific objectives, value and scope of the study. Theoretical

anchorage, literature review, empirical review and knowledge gaps and conceptual framework

8
are presented in chapter two. The methodology to be followed in answering the research

questions is highlighted in chapter three. Chapter four presents results, interpretation and

discussion whereas chapter five presents the summary of results, makes conclusions and

recommendations of the study.

9
 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

Theoretical anchorage and empirical literature are presented in this chapter. Summary of

knowledge gaps and conceptual framework are also included in this chapter.

2.2 Theoretical Literature Review

Key theories that support this study include Financial Intermediation Theory, Liquidity

Preference Theory, Risk Theory and Theory of the Firm. Relevance of each of the theory is

presented at the end.

2.2.1 Financial Intermediation Theory

Gurley and Shaw (1960) advanced the financial intermediation theory. The theory states that

liquidity management is one of core function of a bank by providing financial services to

individuals, businesses and institutions (Levine, 2005). In the time of financial distress, banks’

ability to balance liquidity assets is weakened. Liquidity crisis hurts the operations of the bank

and the economy itself (Syafri, 2012). Affected banks are pushed to financial crisis.

Financial intermediation is intended to minimize information asymmetry while cutting down

transaction costs that arise because borrowers are deficient of lending information whereas

lenders have full information (Shittu, 2012). This theory was aimed at solving information

asymmetry between borrowers and lenders (Woodford, 2010). Though financial intermediary

has not fully eliminated transaction costs owing hoarded information, it has helped to

significantly minimize the costs associated with it. Financial service provision among

individuals, businesses and institutions has been facilitated by the financial intermediation

theory.

10
The theory financial intermediation theory is useful in bridging the gap between the lenders

and prospective borrowers, reduces the transaction costs that would have been incurred at

seeking financial services without proper market knowledge. Financial intermediation theory

highlights the role of financial intermediaries in economy including commercial banks in

bridging the gap existing between small borrowers and lenders. Financial intermediation the

helps eliminate costs associated with information asymmetry.

2.2.2 Liquidity Preference Theory

Keynes (1936) advanced the liquidity preference theory. According to this theory, higher

interest rate securities bearing longer time maturity are requested by investors. Investors will

also attempt to hold assets that are easily coverable to liquid money in case need be. In light to

liquidity preference theory, cost of securities become lower when investors are willing to

relinquish fewer liquid assets.

According to Keynes (1936), three motives dictate the demand for liquidity. The three motives

include transaction, speculative and precautionary (Bibow, 2005). Under transaction motive,

investors hold liquid assets that can be converted easily to liquid money in times of need (Tily,

G2006). Under precautionary, individuals hold liquid assets for emergency or unforeseen

circumstances in case need be to convert. Speculative motive occurs when investors hold liquid

assets with prospects that interest rate will go up in future (Modigliani, 1944).

This theory is essential in this study as it highlights the justification of holding liquid assets by

investors. Commercial banks will thus be aware when to hold more liquid assets or convert

them to liquid money. In doing on commercial banks can meet their debt obligation at ease

while avoiding adverse circumstances related to holding too much liquid assets or too fewer

liquid assets.

11
2.2.3 Risk Theory

Halling et al. (2006) states that a bank must understand the nature of liquid assets it holds.

Thus, commercial banks need to balance between holding more risky and less risky assets

(Berríos, 2013). By understanding the level of liquidity risks various securities pose, commerce

banks are able to time when to convert the liquid assets to money and when not do (Acerbi &

Scandolo, 2008).

Commercial banks will assess the risky levels of its liquid assets. The risks may be operational,

legal, credit or interest rate related. It will then make an inventory of risk level of each of the

liquid assets and make proper timing when to convert them into money or continuing holding

for higher interest.

2.2.4 Theory of the Firm

Theory of the firm was coined by Richard and James (1963). According to the theory of the

firm, an enterprise continues to produce till when marginal revenue equalizes with marginal

costs (Holmstrom & Tirole, 1989). Firms’ production pattern is influenced by desire for profits.

As such, the profit desire behavior influences firms’ decisions on how to allocate resources to

production. It also influences marketing and pricing techniques of their products.

This theory is applicable to the study in understanding on how to enhance operational

efficiency in the firm. Operational efficiency of the firm can be enhanced Theory by prudently

allocating resources based on business needs. Firm decisions on how to produce and market its

products are guided by profit desires.

12
2.3 Empirical Literature Review

Past studies on liquidity risks and financial performance of commercial banks are presented.

Empirical review has been conducted based on the variables of the study which include asset

quality, capital adequacy, bank size and operational efficiency,

2.3.1 Asset Quality and Financial Performance

Sufian et al. (2008) investigated the determinants of commercial banks’ profitability in

Philipine. Panel model design covering 1990-2005 was employed. Asset quality negatively and

significantly impacts profitability of commercial banks in Philippine. Commercial bank

management and operations in Philippine may differ from the context of Kenya hence the

necessity that triggered the curiosity to undertake this study.

Likewise, Vong et al, (2009) studied commercial bank-specific factors and profitability of

commercial banks using ROA in Macao for the years 1993 to 2007. Panel model design was

adopted in the empirical study. Asset quality had negative and significant relationship with

commercial bank performance using ROA.

Liu (2011) investigated how CAMEL model impacts profitability of Chinese commercial

banks quoted at the Shanghai Stock Exchange. The period of the study was 2008-2011 targeting

13 Chinese commercial banks. Asset quality significantly and negatively impacts profitability

of Chinese commercial banks. However, the study focuses solely on Chinese commercial

banks.

Kamande (2017) studied how bank specific factors impacts Kenyan commercial banks’

financial performance using ROA. Predictor variables included asset quality, capital adequacy,

management efficiency and liquidity. Capital adequacy and asset quality positively impacted

commercial bank performance sing ROA. Current study attempts to measure bank performance

using ROE.

13
In Indonesia, Endah et al. (2018) studied liquidity risk and profitability of government owned

ad foreign owned commercial banks. Time scope of the study was 2010-2016 periods. Asset

quality negatively and significantly affects profitability of the government and foreign owned

commercial banks.

2.3.2 Bank Size and Financial Performance

While focusing on commercial banks in SSA countries Buyinza (2010) studied profitability of

these banks covering the years 1999-2006 using panel model. Bank size had a positive and

significant relationship with bank profitability. This was a cross country study contrasting

current study that focus on only one country with aiming of producing specific results for on

particular country.

In Nepal, Jha and Hui (2012) studied how financial characteristics impacts performance of

Nepalese commercial banks. The time scope of the study was 2000-2010 among eighteen

Nepalese commercial banks. Bank size significantly predicted bank performance measured by

use of ROE and ROA. The study focus was Nepalese commercial banks contrasting current

study that targeted Kenyan commercial banks.

In Latin America, Arias, Jara-Bertin and Rodriguez (2013) investigated the determinants of

bank performance employing panel data. Seventy eight (78) commercial banks were drawn

from Brazil, Colombia, Argentina, Venezuela, Chile, Mexico, Peru and Paraguay for the period

1995-2010. It was established that bank size positively influences bank performance while

liquidity risk ha d negative relationship with bank performance.

Kwakwa (2014) studied how bank size affects financial performance of Ghanaian commercial

banks. The measure of financial performance entailed ROE and ROA. Results revealed that

size of bank positively and significantly influenced ROA. However, the relationship of bank

size positively influenced ROE though the relationship was statistically insignificant. Ghanaian

14
commercial banks were the focus of the study, thus the results may not be generalizable to the

Kenyan commercial banks.

Aladwan (2015) investigated how bank size impacts profitability of quoted commercial banks.

The study period was 200-2012. Profitability was measured suing ROE. Output results of the

study showed that profitability of banks differ significantly based on bank sizes.

2.3.3 Capital Adequacy and Financial Performance

In Ghana, Afriyie (2011) investigated the impact of credit risk on performance of rural banks

in the years 2006-2020. Panel data was adopted in the study. Capital adequacy positively and

significantly impacts bank performance. It looked on commercial banks in Ghana unlike

current study that focused on commercial banks.

In SSA, Ezra (2013) investigated the determinants of the profitability of commercial banks.

The period of study was 1999-2006 employing unbalanced panel model. Capital adequacy

positively and significantly impacts profitability of commercial banks. This was a cross country

study contrasting current study that focus on only one country with aiming of producing

specific results for on particular country.

In Nigeria, Ogboi and Unuafe (2013) studied the nexus between credit risk and profitability of

commercial banks for the period 2004-2009. Capital adequacy positively and significantly

impacts financial performance of Nigerian commercial banks. However, the study looked

specific on Nigerian banks unlike current study that focus on commercial banks in Kenya.

Okoth and Gemechu (2013) investigated factors that impact financial performance of

commercial banks in Kenya for the years 2001-2010. Capital adequacy significantly impacts

financial performance of Kenyan banks. This study failed to undertake assumption tests and

this may have impacted on the accuracy of the coefficient estimate. Current study checked all

the assumptions of the study before estimating actual model.

15
In South Africa, Ifeacho and Ngalawa (2014) investigated how macroeconomic impacts bank

performance. The study scope was 1994-2011 where bank performance was measured using

ROE and ROA. There is a positive and significant relationship between capital adequacy and

ROE. The study focused on commercial banks in South Africa ad has it is known, business

environment for operation among commercial banks may differ from country to country or

region to region.

In Bahrain, Trabelsi (2015) investigated the impact of liquidity risk on profitability Islamic.

OLS was used to model relationship between independent variables and both ROE and ROA.

Capital adequacy positively and significantly impacts ROA and ROE of Islamic banks.

While focusing on Central and Eastern Europe countries, Antoun, Coskun and Georgiezski

(2018) explored what determines financial performance of banks in the region. The study was

panel 2009 to 2014. It was established that asset quality had negative relationship with bank

size and positive relationship with business mix. Capital adequacy has a negative relationship

with bank size and positive linkage with bank concentration.

2.3.4 Operational Efficiency and Financial Performance

Ogboi and Unuafe (2013) analyzed how credit risk impacted Nigerian bank’s profitability

covering the yeas 2004-2009. This was a panel study. Operational efficiency is positively and

significantly related to bank’s financial performance using ROE. Nonetheless, the study only

looked on Commercial Banks in Nigerian contrasting this study that studied commercial banks

in Kenya.

Okoth and Gemechu (2013) investigated factors that impacts profitability of commercial banks

in Kenya. The study was panel covering the years 2001-2020. Operational efficiency positively

and significantly impacts banks profitability. The study failed to conduct diagnostic test which

may have impacted on the accuracy of the estimates. This study undertook all the assumption

16
tests including Hausman, autocorrelation and heteroscedasticity to ensure that model estimates

are correct.

Wekesa (2016) investigated how liquidity risk impacts profitability of commercial banks

operating in Kenya. This was a panel study covering the period 2012-2018. Management

efficiency positively impacts profitability of commercial banks operating in Kenya.

Ibrahim (2018) investigated the nexus between liquidity risks and profitability of Oversea-

Chinese Banking Corporation operating in Singapore. This was a panel study covering the

years 2003 and 2017. Operational efficiency positively impacted the profitability of the

Oversea-Chinese Banking Corporation.

Zolkifli, Samsudin and Yusof (2019) investigated the determinants of liquidity risks and how

it impacts profitability of commercial banks in Malaysia and Bahrain. This was a panel study

covering the years 2008-2016. Management efficiency is a significant predictor of the

profitability of commercial banks in Malaysia and Bahrain.

2.3.5 Money Supply, liquidity risk and financial performance

Mulwa (2015) conducted a study on the effect of monetary policy on the financial performance

of commercial Banks in Kenya. The study adopted descriptive research design. The study

found that one of monetary policy, was Central Bank buys securities on the open market, it

increases the reserves of Commercial banks, making it possible for them to expand their loans

which increase the money supply.

Marende (2017) determined the effect of macroeconomic factors on financial development of

commercial banks in Kenya. The study employed quarterly secondary data which was obtained

from the Central Bank of Kenya. The financial development of commercial banks as measured

by the above 4 ratios was found to be positively correlated with money supply (M3).

17
Tran, Nguyen, Nguyen and Tran (2019) explored the determinants of liquidity risk of

commercial banks in Vietnam from 2010 to 2015. OLS regression method was used. It was

found that smooth pumping of money through the open market stabilizes the liquidity of the

banking system was stabilized.

2.4 Literature Review Summary and Knowledge Gaps

Summary of knowledge gaps are highlighted here in. Studies critiqued are related to liquidity

risk and commercial bank performance in Kenya and across the globe.

Table 2.1: Knowledge Gaps

Author & Objective Findings Gaps How current study

year fills the gap

Liu (2011) How CAMEL Asset quality Focused largely Focuses only Kenyan
model impacts significantly and on commercial commercial banks.
profitability of negatively affects banks in China
Chinese banks profitability of
commercial banks.

Buyinza Profitability of Bank size The study was Focuses only Kenyan
(2010) commercial banks in significantly and done across commercial banks.
SSA countries. positively affects countries
bank performance

Kwakwa Bank size and Bank size only looked at Focuses only Kenyan
(2014) profitability of significantly and commercial banks commercial banks.
commercial banks in positively affects in Ghana
Ghana. bank performance

Ezra (2013) Determinants of the Capital adequacy The study was Focuses only Kenyan
profitability of significantly and done across commercial banks.
commercial banks positively impacts countries
profitability in SSA

18
 the profitability of
banks

Ifeacho et al. How bank specific Capital adequacy Only looked at Focuses only Kenyan
(2014) factors significantly and Banks in South commercial banks.
macroeconomic positively affects Africa whose
elements impacts profitability of operations may be
bank performance banks differing from
in South Africa operations
environment of
Kenyan banks

Source: (Researcher, 2021)

2.5 Conceptual Framework

Figure 2.1 illusrates how capital adequacy, asset quality, bank size and operational efficiency

as predictor variables and how they affects profitabiity of commercial banks as the depndnt

variable. Asset quality is measured as ratio of NPL to Total loans. Bank size is measured using

totals assets a bank control. CAR was used to operationalize Capital adequacy. Operational

efficiency was operationalized as operating income divided by total assets. Financial

performance as outcome variable was operationalized using ROE which is measured as ROE.

Money supply as the moderator varible was operationalized using time deposit and savings

and measured as M2.

19
Independent Variables Dependent Variable

Liquidity Risk Factors

Asset Quality Ho1

 Ratio of NPL to
Total Loans

Bank Size Ho2

 Total Assets Financial

Performance

 Return on
Capital Adequacy Ho3
Equity
 Capital Adequacy
Ratio

Operational Efficiency Ho4

 Operating income to
Ho5
total assets

Money Supply

 M2-Intermediate
measure

Moderating Variable
Figure 2.1: Conceptual Framework

Source: Researcher (2021)

20
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

The methodology that guided this research is highlighted in this section. The design,

population, sample size and sampling procedures, empirical model, technique of data

collection, data analysis approach and ethical issues to be observed are presented herein.

3.2 Research Design

Research design is strategy that guide research (Cresswell, 2014). Causal research design was

utilized in this study. Cause and effect between variables can be achieved through causal

research design (Mugenda & Mugenda, 2011). Causal research design is suitable in

determining the relationship between two or more variables in a study and help answer the

where, how, why and what questions in a study population. In Indonesia, Endah et al. (2018)

employed causal research design to investigate how liquidity risk influence profitability of

government owned ad foreign owned commercial banks. In this study, it enabled to determine

how liquidity risks influence financial performance of commercial banks operating in Kenya.

3.3 Empirical Model

It was predicted that liquidity risks factors affect financial performance of commercial banks.

The empirical model to be determined is;

Yit = β0 + β1X1it + β2X2it + β3X3it + β4X4it + µit

Where:

Y it - Financial Performance

β0 - Constant

X1it – Bank Size of bank i at time t

21
X2it – Capital Adequacy of bank i at time t

X3it – Asset Quality of bank i at time t

X4it – Operational Efficiency of bank i at time t

β1 – β4= Coefficients of the model of bank i at time t

i=commercial bank

t=time, 2012-2017

µ= Error term, capturing other elements not in the model

The subsequent model was used to test the moderating effect of money supply on the

relationship between liquidity risk factors and financial performance. According to WHisman

and McClelland (2005), moderating effect is present if the interaction of coefficient statistically

differs from zero.

Yit = β0 + β1 Xit+ ε…….......................................................................................................3.2

Yit = β0 + β1Xit + β2M0it + β3Xit * M0it + ε..........................................................................3.3

Where, Yit = Financial Performance

Xit = Liquidity Risk Factors

M0it = Money Supply

Xit * M0it = Interaction term

β1, β2, and β3 = Beta coefficients

ε = Error term

22
3.4 Operationalization and measurement of Variables

Bank size, asset quality, operational efficiency and capital adequacy are the predictor variables.

Financial performance is the outcome variable operationalized using Return on Equity (ROE).

Table 3.1 shows how variables were operationalized in the study.

Table 3.1: Operationalization and measurement of Variables

Variable Type Operationalization Measurement scale

Bank Size Independent Total Assets Ratio

Capital Independent Minimum capital Ratio
Adequacy requirement
Operational Independent Operational income Ratio
efficiency
Asset Quality Independent Ratio of NPL to total Ratio
loans
Money Supply Moderating Quantitative of Money in Ratio
circulation
Dependent
Financial Return on shareholders’ Ratio
Performance wealth

Source: (Researcher, 2021)

3.5 Target Population

Target population is a group of items to be studied. The population needs to be carefully chosen

to be reflective of the study population. Unit of analysis are the commercial banks while unit

of observation are financial books from individual banks and CBK. The study targeted 42

commercial banks covering the period 2012-2017 (Appendix 1).

3.6 Sample size and sampling design

Lohr (2009) defines sampling is the technique in selecting a sample size. A census of all the 42

commercial banks was undertaken. Census is done when target population is small and the

must be included in the study.

23
3.7 Data Collection Instrument

Before actual collecting data, permission to undertake the study was sought from NACOSTI.

Data extraction was conducted by use of secondary data collection template (Appendix II). The

data was extracted from financial books from individual commercial banks and CBK reports.

Data collected covered the years 2012-2017.

Validity of data collected was ensured by only extracting data only from audited financial

books. The management of the individual commercial banks further validated the accuracy of

the financial reports. Validity of financial reports was meant to ensure that only correct data

are extracted.

3.8 Data Analysis

Secondary information extracted from books of accounts were analyzed to derive meaning

from them. Stata 14.0 was used in analyzing the data where descriptive (minimum, maximum,

mean and standard deviation) and inferential statics (panel regression) were employed.

Descriptive statistics were used to describe and summarize the ratios of the variables in the

study that included asset quality, bank size, capital adequacy, operational efficiency, money

supply and commercial bank financial performance. Inferential statistics was used to determine

the effect of asset quality, bank size, capital adequacy and operational efficiency on commercial

bank financial performance. 95% confidence interval was employed to check the significance

of the test generated model and to accept or reject the hypotheses.

3.9 Diagnostic Tests

The assumption tests included autocorrelation and heteroscedasticity, unit root test, hausman

test, normality tests and multicollinearity.

24
3.9.1 Serial correlation

To cater for serial correlation, the Wooldridge test for autocorrelation was employed. Serial

correlation is a common problem experienced in panel data analysis and must be accounted for

to achieve the correct model specification. According to Wooldridge (2002), failure to identify

and account for serial correlation in the idiosyncratic error term in a panel model would result

into biased standard errors and inefficient parameter estimates. The null hypothesis of this test

is that the data has no serial correlation. If the serial correlation is detected in the panel data,

then the Feasible Generalized Least Squares estimation is adopted. The p value of > 0.05

indicates absence of serial correlation.

3.9.2 Heteroscedasticity

Since the data for this research is a cross-section of firms, this raises concerns about the

existence of heteroscedasticity. Regression models assume that the error term is

homoskedastic, that is, it has constant variance. If the error variance is not constant, then there

is heteroscedasticity in the data. Running a regression model without accounting for

heteroscedasticity would lead to unbiased parameter estimates (Breusch & Pagan 1979). To

test for heteroscedasticity, the Breusch-Pagan/Godfrey test was used. The null hypothesis of

this study was that the error variance is homoskedastic. When p-value is <0.05, there is

Heteroscedasticity; when p-value is >0.05, there is no Heteroscedasticity.

3.9.3 Unit root test

Since panel data have both cross-sections and time series dimensions, there is need to test for

stationarity of the time series because the estimation of the time series assumes that the

variables are stationary. Estimating models without considering the non-stationary nature of

the data would lead to unauthentic results (Gujarati, 2009). In this study, the researcher

employed Fisher-type test of unit root in panel data. Based on the p-values of individual unit

25
root tests, Fisher's test assumes that all series are non-stationary under the null hypothesis

against the alternative that at least one series in the panel is stationary. A p-value<0.05 indicates

absence of unit root while p-value> 0.05 indicates presence of unit root test.

3.9.4 Hausman Test

When performing panel data analysis, one must determine whether to run a fixed effects model

or a random effects model. Hausman’s specification test (1978) was used to determine whether

fixed or random effect should be used. P-value>0.05 implies random and effect model

appropriate, otherwise, fixed model is run.

3.9.5 Normality Tests

The normality assumption (ut ~ N (0, σ2)) is required to conduct single or joint hypothesis tests

about the model parameters (Brooks, 2008). Bera and Jarque (1981) tests was used to test

normality. The study tested the null hypothesis that the disturbances are not normally

distributed. If the p-value is less than 0.05, the null of normality at the 5% level is rejected. If

the data is not normally distributed a nonparametric test was used appropriate.

3.9.6 Multicollinearity

The study employed Variance Inflation Factor (VIF) to measure multicollinearity (Gujarati,

2009; Cooper & Schindler, 2008). Failure to account for perfect multicollinearity results into

indeterminate regression coefficients and infinite standard errors while existence of imperfect

multicollinearity results into large standard errors. When VIF < 10; there is no

multicollinearity; when VIF ≥ 10 presence of multicollinearity.

26
3.10 Ethical Issues

Research letter from Kenyatta University was employed to seek permission to undertake study.

Research permit was sought from NACOSTI. Any research paper and materials used in this

study were properly cited and referenced. Data extracted from the financial books were used

for the purpose of the study only.

27
 CHAPTER FOUR

DATA ANALYSIS, PRESENTATION AND INTERPRETATION

4.1 Introduction

In this chapter, the how data is analyzed, presented and interpreted is conducted. Data analysis

involved descriptive statistics, line graphs and panel models.

4.2 Descriptive analysis

Descriptive output is shown in this section. Data from all the 42 commercial banks were
collected which was 100% participation rate. Descriptive results included means, minimums,
maximums and standard deviations and are as shown Table 4.1.

Table 4.1: Descriptive Results

Variable Obs Mean Std. Dev. Min Max
Capital adequacy 252 0.169182 0.085323 0.100099 0.847187
Bank size in KES million 252 76652.23 103876 2584 555630
Asset quality 252 0.123832 0.106522 0.004569 0.85646
Operational efficiency 252 0.310406 0.213613 0.01097 0.991743
Money Supply in KES billion 252 895.9 768 678 2197.8
ROE 252 0.133349 0.19332 -0.908 0.494
Source: Research Data, 2021

The first objective determined how asset quality affects financial performance of commercial

banks operating in Kenya. Descriptive output showed that the mean of asset quality is

0.123832. The minimum asset quality is 0.004569 and maximum of 0.85646. The standard

deviation is 0.106522 implying that asset quality varied across the study period. Asset quality

entails the assessment of bank’s assets with aiming of understanding the risks each asset

possesses. The results concur with Ezra (2013) who studied determinants of profitability among

commercial banks in SSA, establishing that asset quality negatively impacts profitability.

Sound assets quality entail proper award of loans considering credit worth of borrowers and as

per loan ward guiding policies. According to Liu (2011) who investigated how CAMEL model

28
impacts profitability of Chinese commercial banks revealed that asset quality negatively and

significantly impacts financial performance of Chinese commercial banks.

Second objective was opined to determine how size of a bank influences its profitability. And

the results entailed means, standard deviations, minimums and maximums. It was established

that average bank size using total assets was KES 76652.23 million, smallest bank size

controlled KES 2584 million worth of assets while largest bank controlled KES 555,630

million worth of total assets. The standard deviation was 103876 implying that bank sizes

varied across banks. The efficiency and effectiveness of a bank in converting assets into profits

is linked to the amount of assets it controls. These findings are in line with Kwakwa (2014)

who investigated how size of a bank affects financial performance of Ghanaian commercial

banks and revealed that size of a bank positively influenced ROE though the relationship was

statistically insignificant. Likewise, Jha and Hui (2012) studied how financial characteristics

impacts performance of Nepalese commercial banks and established that bank size

significantly predicted bank performance measured by use of ROE and ROA.

The third objective was to determine how capital adequacy affects commercial bank financial

performance in Kenya. Descriptive data analysis included means, standard deviations,

minimums and maximums. Average capital adequacy is 0.169182. Lowest capital adequacy

ratio was 0.100099 while highest capital adequacy ratio 0.84719 in that order. The Std. Dev.

was 0.085323 implying that capital adequacy was varying across banks. Capital Adequacy

connotes the amount of capital held by commercial banks to offset liquidity risks in times of

uncertainty. Capital adequacy act as a safety net of protecting depositors in case the bank

collapses or goes out of the market. The results are in line with Ifeacho and Ngalawa (2014)

investigated how macroeconomic impacts bank performance and found that capital adequacy

positively and significantly impacts ROE. As per the CBK regulations, banks need to hold

29
minimum of 14% of their aggregate assets as core capital. Commercial banks controlling

substantial large amount of capital are able to take up on more risky and rewarding investments

as compared to banks holding less capital and have to rely on debt financing. This is due to

debt covenants which restricts borrower from financing high risk projects. These results concur

with Pradhan and Shrestha (2017) while studying impact of capital adequacy on commercial

banks’ financial performance in Nepal and established that core capital ratio negatively

profitability of commercial banks measured using ROE in Nepal.

Forth research objective endeavored in determining how operational efficiency affects

commercial bank financial performance where descriptive results entailed the means, standard

deviations, minimums and maximums. The Average operational efficiency was 0.310406.

Lowest operational efficiency ratio was 0.01097 and highest operational efficiency ratio was

0.991743. The standard deviation was 0.213613 implying that operational efficiency varied

across banks. Efficient commercial banks are able to allocate and use their resources effectively

in line with business needs. Operational efficiency determines the solvency state of a bank. The

findings concur with Ogboi et al. (2013) who analyzed how credit risk impacted Nigerian bank

performance during the time period 2004-2009 and noted that operational efficiency is

positively and significantly related to bank’s financial performance using ROE. The

competitiveness in utilizing resources among commercial banks is dependent on operational

efficiency of the bank. Operational efficiency helps overall managerial efficiency of banks

impacting bank performance. The findings concur with Itumo (2013) that operational

efficiency significantly and positively impacts commercial bank’s performance.

The fifth objective assessed how money supply moderates the nexus that exist between

liquidity risk factors and commercial bank financial performance where descriptive result

output entailed means, standard deviations, minimums and maximums. Quantified mean of

30
money supplied in the economy was KES 895.9 billion. Lowest money circulating in the

economy was KES 678 billion whereas highest money circulating in the economy was KES

2197.8 billion. The Std. Dev was KES 769 billion implying that money circulating in the

economy was varying during the measurement period. The quantity of the money circulating

in the economy is a significant measure of fiscal policies. Nonetheless, basing on a study by

Mulwa (2015), fiscal policy mechanisms shows insignificant impact of money supply on

commercial bank financial performance. Central Bank of Kenya via Open Market Operations,

engage in purchasing and selling securities with intention of regulating money circulating the

economy. As CBK purchases the securities, it increases commercial banks money reserves

allowing them to increase the amount of loans available for award. Descriptive output revealed

that average ROE was 0.13335. The lowest return on equity was -0.908 while a bank with

highest ROE is 0.494. Negative ROE imply that the bank paid equity to shareholders though it

made losses. Positive ROE of 0.494 implies that the bank was performing very well in terms

of ROE. The Std. Dev. was 0.19331 implying that ROE was varying across the banks.

4.3 Trend analysis

Line graphs were drawn for bank size, operational efficiency, asset quality, capital adequacy

and operational efficiency and ROE. Line graphs are shown here below.

4.3.1 Asset quality

Line graph was used to depict growth of asset quality among commercial banks operating in

Kenya for the period 2012-2017. Graph line is shown in Figure 4.1.

31
 .1300

.1275

.1250

.1225
Asset quality

.1200

.1175

.1150

.1125

.1100
2012 2013 2014 2015 2016 2017

Year

Figure 4.1: Asset quality

Trend line in Figure 4.1 shows that asset quality declined in 2012/2013 but later rose. Asset

quality entails the assessment of bank’s assets with aiming of understanding the risks each asset

possesses. Asset quality can be determined by looking at loan loss provisions, loan advances

and NPLs. Asset quality ensures that loans are awarded to credit worth customers who can

repay the loan. The results concur with Ezra (2013) who studied determinants of profitability

among commercial banks in SSA, establishing that asset quality negatively impacts

profitability.

4.3.2 Bank size

Line graph was used to depict growth of assets controlled by commercial banks operating in

Kenya for the period 2012-2017. Figure 4.2 shows line graph depicting its growth.

32
 100,000

90,000
Bank size in KES millions

80,000

70,000

60,000

50,000
2012 2013 2014 2015 2016 2017

Year

Figure 4.2: Bank size

Figure 4.2 shows that bank size in terms of asset growth has been increasing constantly from

2012 to 2017. Larger banks with adequate assets are able to finance their operations, easily

covert their liquid assets into funds and also are able to diversify liquidity risks minimizing

their impact. The efficiency and effectiveness of a bank in converting assets into profits is

linked to the amount of assets it controls. These findings concur with Jha et al. (2012) studied

how financial characteristics impacts profitability of Nepalese commercial banks and

established that size of bank significantly predicted bank performance measured by use of ROE

and ROA.

4.3.3 Capital adequacy

Line graph was used to depict capital adequacy from the year 2012/2017 held by commercial

banks operating Kenya. Figure 4.3 depicts the growth of capital adequacy in the study period.

33
 .180

.175

.170
Capital adequacy

.165

.160

.155

.150

.145

.140
2012 2013 2014 2015 2016 2017

Year

Figure 4.3: Capital adequacy

Line graph above shows that capital adequacy declined in 2012/2013, rose in the period

2014/2016 and later declining in the approach to 2017. Capital adequacy measures bank’s

ability to pay for its obligation and cushion itself against precedent losses. Capital adequacy

aims to protect customers money held deposits in the event of eminent collapse of the bank.

Capital adequacy act as a safety net of protecting depositors in case the bank collapses or goes

out of the market through avoidance and hedging. These findings concur with Okoth et al.

(2013) who investigated factors that impact commercial bank financial performance in Kenya

for the period 2001-2010 and noted that capital adequacy significantly impacts performance of

commercial banks measured using ROE.

34
4.3.4 Operational efficiency

A line graph for operational efficiency was drawn to illustrate how it grew for the period

2012/2017. Figure 4.3 depicts the growth of operational efficiency during the study period.

.40

.38
Operational efficiency

.36

.34

.32

.30

.28
2012 2013 2014 2015 2016 2017

Year

Figure 4.4: Operational efficiency

Figure 4.4 shows that operational efficiency declined during the period 2012/2013 but shot up

in 2014/2016 and later dropping drastically in the approach of 2017. Efficiency in business

operations is a significant predictor of bank performance. The ability of a bank to convert its

resources into profits depicts its operational efficiency. The results are in agreement with

Ibrahim (2018) who studied the linkage between liquidity risks and performance of Oversea-

Chinese Banking Corporation operating in Singapore and established that operational

efficiency positively impacted the profitability of the Oversea-Chinese Banking Corporation.

35
4.3.5 ROE

Growth of ROE in commercial banks operating in Kenya across the period 2012/2017 was

modeled graphically. Figure 4.5 depicts growth of ROE during the study period.

.156

.152

.148
ROE

.144

.140

.136

.132
2012 2013 2014 2015 2016 2017

Year

Figure 4.5: Return on equity

Figure 4.4 shows that operational efficiency declined during the period 2012/2013 but shot up

in 2014/2016 and later dropping drastically in the approach of 2017. The drop towards 2017

may have been attributed to political tensions that always come along with elections.

4.4 Inferential Results

Inferential results entailed correlation matrix and panel models. Correlation allows the study to

depict the association among variables and to check presence of multicollinearity (Wheeler &

Tiefelsdorf, 2005). Regression depicts the linkages that exist between predictor and outcome

variables.

36
4.4.1 Correlation Analysis

Correlation analysis facilitated in determining the strength of association among variables.

Correlation results are depicted in Table 4.2.

Table 4.2: Correlation Matrix

Bank Capital Asset Operational
ROE size adequacy quality efficiency
ROE 1.000

Asset quality -0.412 1.000

sig. p-
values 0.047

Bank size 0.509 0.176 1.000

sig. p-
values 0.000 0.005

Capital adequacy 0.253 0.047 0.406 1.000

sig. p-
values 0.000 0.485 0.000

Operational
efficiency 0.467 0.093 0.713 0.317 1.000
sig. p-
values 0.000 0.136 0.000 0.000

Asset quality and commercial bank financial performance have a negative and significant

association (r=-0.412, p=047). Asset quality entails the assessment of bank’s assets with aiming

of understanding the risks each asset possesses. This act allows the bank to segregate customers

based in their ability to repay loans. These findings concur with Vong et al, (2009) who studied

commercial bank-specific factors and commercial bank profitability using ROA in Macao

during the period 1993 to 2007 and revealed that asset quality negatively and significantly

relate to commercial bank performance using ROA. Asset quality helps assess worthy

customers who request loans and are likely to repay back. Nonetheless, Mburu (2017)

37
established that asset quality insignificantly relate to commercial banks performance using

ROE.

Bank size and commercial bank financial performance are positively and significantly

associated (r=0.509, p=000). Big banks stands better chances by their strength in terms of

economies of scale in mobilizing resources, cut down costs, and improve operational efficiency

with aim of generating profits. Though mixed results on the impact of bank size on firm

performance are evident. With considerable economies of scale, bank size can positively

impact firm performance. Likewise, bank size may result to loss because of inefficiency in

mobilizing resources. The findings concur with Buyinza (2010) who studied performance of

commercial banks in SSA covering the period 1999/2006 and established that size of bank has

a positive and significant relationship with financial performance using ROE. According to

Kwakwa (2014) who studied how bank size affects profitability of Ghanaian commercial banks

revealed that size of bank positively influenced ROE though the relationship was statistically

insignificant. The efficiency of a bank to mobile resources impacts bank performance.

Capital adequacy has a positive and significant association with commercial bank financial

performance using ROE (r=0.253, p=000). Capital adequacy is a significant solvency measure

used as a safety net in protecting depositors’ money. Capital adequacy expresses the ability of

the bank to manage liquidity risks and make prudent financial decisions regarding bank’s

liquidity position during financial crisis. Capital adequacy is also essential in setting prices of

bank services and product thus impacting revenue returns. The results agree with Ogboi and

Unuafe (2013) who studied how credit risk impacts profitability of commercial banks for the

years 2004-2009 and established that capital adequacy has a significant and positive linkage

with financial performance of Nigerian commercial banks. The bank's capital helps to maintain

depositors’ safety of their funds. Based on Almazari et al. (2017) in a study on how capital

38
adequacy affects performance of Saudi banks by comparing two banks and established that

bank size positively impacts financial performance using ROE.

Operational efficiency and commercial bank financial performance had a positive and

significant association (r=0.467, p=000). Operational efficiency connotes the ability of a bank

to effectively mobilize resources to generate profits a bank operating effectively is able to

channel its resources in the right manner increasing revenue generation. In the same way,

operational efficiency in the bank enhances service delivery expanding customer base. The

findings concur with Afriyie (2011) in a study on impact of credit risk on profitability of

Ghanaian commercial banks for the years 2006-2010, it was established that operational

efficiency positively and significantly influence commercial bank financial performance using

ROE. Operational efficiency entails effective, prudent use of resources in a manner that

generates profit to the bank. As per Ndolo (2015), operational efficiency has a positive

relationship with bank performance using ROA as measure of profitability.

4.5 Diagnostic Tests

Nonetheless it worthwhile to note that regression analysis has some weakness as a model. There

is an assumption that cause-effect relationship do not change. This assumption does not always

hold resulting to wrong coefficient estimates. Model assumption tests were checked before

undertaking actual regression to avoid getting inaccurate parameter estimates of the model.

Assumption tests are tested to make sure that correct parameter estimates of the model are

estimated. Model assumption tests tested in this study include Heteroscedasticity and serial

autocorrelation.

39
4.5.1 Autocorrelation Test

Autocorrelation Test was undertaken to ensure that error terms across time are constant.

Breusch-Godfrey LM test was employed to check serial correlation. Serial correlation results

are shown in Table 4.3.

Table 4.3: Breusch-Godfrey Autocorrelation Test:

F-statistic 2.33528 Prob. F(2,249) 0.1074

Obs*R-squared 4.87327 Prob. Chi-Square (2) 0.0875
Source: Author, 2021

Results in Table 4.3 indicates that null hypothesis is not rejected hence no serial correlation.

The p-value was 0.1075>0.05 implying absence of serial correlation.

4.5.2 Heteroscedasticity Test

Heteroscedasticity test is undertaken make sure that error terms in the data are correlated over

time. Time series data to be included in the model should be homoscedastic. Breusch-Pagan

test was employed to check Heteroskedasticity. Heteroskedasticity output shown in Table 4.4.

Table 4.4: Heteroskedasticity output

F-statistic 5.332026 Prob. F(4,51) 0.1012

Obs*R-squared 16.51327 Prob. Chi-Sqr.(4) 0.0024
Scaled explained SS 27.94768 Prob. Chi-Sqr. (4) 0.0000

The null hypothesis that residuals are Homoskedastic is not rejected. The p-value of

0.1012>0.05, implying that the data is homoskedastic. It was therefore concluded that the data

did not suffer from heteroscedasticity and could be used for panel analysis.

4.5.3 Unit Root test

Since panel data have both cross-sections and time series dimensions, there is need to test for

stationarity of the time series because the estimation of the times series assumes that the

variables are stationary. Estimating models without considering the non-stationary nature of
40
the data would lead to unauthentic results (Gujarati, 2009). The study employed Fisher-type

test in testing the stationarity of the data. Stationarity results are presented in Table 4.5. The

hypotheses to be tested were;

Ho: All panels contain unit roots

Ha: At least one panel is stationary

Table 4.5: Unit Root Test

Inverse
Inverse chi- Inverse logit t Modified inv.
squared (70) normal (179) chi-squared
Variable P Z L* Pm
Asset quality test statistic 99.4495 -1.8098 -1.8875 2.2875
p-value 0.0178 0.0352 0.0303 0.0111
Bank size test statistic 262.0531 -9.6049 -11.3366 15.8378
p-value 0.000 0.000 0.000 0.000
-
Capital adequacy test statistic 357.6492 11.9497 -15.5291 23.8041
p-value 0.000 0.000 0.000 0.000
Operational
efficiency test statistic 198.3579 -3.9093 -6.8028 10.5298
p-value 0.000 0.000 0.000 0.000
Money supply test statistic 165.2019 -2.5214 -4.5122 7.7668
p-value 0.000 0.006 0.000 0.000
Financial
performance test statistic 221.4198 -8.991 -9.5401 12.4516
p-value 0.000 0.000 0.000 0.000

The stationarity results test for unit root revealed that, at level asset quality, bank size and

capital adequacy were stationary since p-value<0.05 at P, Z, L* and Pm. Likwise, operational

efficiency, money supply and financial performance, were stationary at level. This means that

the results obtained are now not spurious (Gujarati, 2009) and so panel regression models could

be generated.

41
4.5.4 Hausman Test

When performing panel data analysis, one must determine whether to run a random effects

model or a fixed effects model (Baltagi, 2005). In order to make a decision on the most suitable

model to use, both random and fixed effects estimate coefficients. The study used Hausman’s

specification test (1978) to choose between fixed and random effect models. Table 4.6 shows

the results of Hausman test.

H0: Random effect is appropriate

Ha: Fixed effect is appropriate

Table 4.6: Hausman Random Test for Random and Fixed Effects

Financial performance
Column1 (b) (B) (b-B) sqrt(diag(V_b-
V_B))
fixed Random Differenc S.E.
e

Asset quality 6.154319 2.368167 3.786152 4.642177

Bank size -9.42823 -15.33 5.901754 5.092194

Capital adequacy -4.61644 -2.01704 -2.599398 1.847248

Operational efficiency -33.2721 -17.7489 -15.52319 22.66803

chi2(4) 5.60
Prob>chi2 0.2312

The null hypothesis of Hausman test is that, the random effects model is preferred to the fixed

effects model. To predict the panel model, Hausman test revealed a chi-square of 5.60 with a

p-value of 0.2312 indicating that at 5 percent level of significance, the chi-square value

obtained is statistically insignificant. Thus, the researcher does not reject the null hypothesis

42
that random effects model is preferred to fixed effect model. The Hausman results conclude

that random effect is appropriate model.

4.5.5 Normality Test

The normality assumption (ut ~ N (0, σ2)) was required in order to conduct single or joint

hypothesis tests about the model parameters (Brooks, 2008). Table 4.7 shows the normality

results using for skewness and Kurtosis test for the non-financial firms. Bera and Jarque (1981)

tests of normality were performed. If the p-value is less than 0.05, the null of normality at the

5% level is rejected. If the data is not normally distributed a non-parametric test will be most

appropriate. The study tested the null hypothesis that, the disturbances are not normally

distributed.

H0: The data are not normally distributed

H1: The data are not normally distributed

Table 4.7: Normality Test

Variable Observation Skewness Kurtosis p-value

Asset quality 252 1.0670 0.7324 .166
Bank size 252 3.3921 0.9205 .453
Capital adequacy 252 2.0211 0.6413 .825
Operational efficiency 252 4.8153 0.5104 .967
Money supply 252 3.0634 0.5679 .084
Financial performance 252 5.0481 0.7204 .063

Table 4.7 shows the normality results using for Skewness and Kurtosis test. The P-values were

higher than the critical 0.05 and thus it is concluded that the data is normally distributed.

4.5.6 Multicollinearity Test

According to William (2013), multicollinearity refers to the presence of correlations between

the predictor variables. In severe cases of perfect correlations between predictor variables,

multicollinearity can imply that a unique least squares solution to a regression analysis cannot

43
be computed. Multicollinearity was assessed in this study using the variance inflation factors

(VIF). According to Alin (2010), VIF values in excess of 10 is an indication of the presence of

Multicollinearity. Collinearity statistics (Table 4.8) indicated a Variance Inflation Factor (VIF)

<10 for all the variables thus an indication that the variables were not highly correlated, hence

no existence of Multicollinearity. This is an indication of the suitability of the variables for

further modeling using panel regression analysis.

Table 4.8: Multicollinearity Test

Growth in Market
Growth in Earnings Per Share Capitalization
Variable 1/VIF VIF 1/VIF VIF
Asset quality 1.16 0.865498 2.11 0.474861
Bank size 1.14 0.874819 1.52 0.658248
Capital adequacy 1.03 0.967385 1.25 0.800058
Operational efficiency 1.02 0.977179 1.54 0.650159
Mean VIF 1.09 1.6

The results in Table 4.8 indicated absence of statistical significance multicollinearity since the

VIF of all the variables were less than 10. Thus, the variables are not linearly correlated and

thus panel regression modeling could be conducted to determine the effect of bank size, capital

adequacy, asset quality and operational efficiency on commercial bank financial performance.

4.6 Panel Regression Results

Panel model using regression coefficients were employed to depict how asset quality, bank

size, capital adequacy and operational efficiency impact commercial bank financial

performance. Model output is shown in Table 4.9.

Table 4.9: Panel Regression Results

Variable Coef. Std. Err. z P>z [95% Conf. Interval]
Asset quality -0.55404 0.096081 -5.78 0.000 -0.74335 -0.36672
Bank size 0.097155 0.025873 3.76 0.000 0.046445 0.147864
Capital adequacy 0.2129 0.046615 4.57 0.093 0.46106 0.035259
Operational efficiency 0.14444 0.065837 2.19 0.028 0.27348 0.0154
_cons 0.73975 0.294257 2.51 0.012 1.31649 0.16302
R-sq: within = 0.4717
44
 between = 0.5440
overall = 0.4255
Wald chi2(4) = 144.46
Prob > chi2 = 0.0000
Source: Author, 2021

Panel model showed that size of bank, capital adequacy, asset quality and operational

efficiency are adequate predictors of commercial bank financial performance as indicated by

R2 of 0.4255 implying that size of bank, capital adequacy, asset quality and operational

efficiency explain 42.55% of commercial bank financial performance using ROE. The findings

concur with Meshak and Nyamute (2016) that liquidity risks significantly influence

commercial bank financial performance.

The overall model was statically significant since the F-value of 144.46 is more than f-critical

of 5.37 hence the model is statistically fit. From the model, size of bank, capital adequacy, asset

quality and operational efficiency adequately predicts bank performance. In addition, the p-

value 0.000< 0.05 hence this model was fit. As in line with results by Olongo (2013),

commercial banks have to continue operating even during rising liquidity risks. The panel

model estimated is:

Y = 0.73975- 0.55404X1+ 0.097155X2+ 0.2129X3 + 0.14444X4

Where:

Y = Financial performance of commercial banks

X1 = Asset quality

X2 = Bank size

X3 = Capital adequacy

X4 = Operational efficiency

45
Hypothesis testing was conducted based on panel model coefficients and their significance

level.

Hypothesis I:

H01: There is no significant relationship between asset quality and financial performance of
commercial banks in Kenya.

It was established that coefficient of asset quality negatively and significantly impacts

commercial bank financial performance (β =-0.55404, p=0.000<0.05). The results imply that

as asset quality increases by one unit, financial performance using ROE of commercial banks

declines by -0.55404 units. Hypothesis testing was checked using p-value technique. The null

hypothesis (Ho1) is rejected if p-value calculated is smaller than 0.05, but Ho1 is not rejected if

p-value calculated>0.05. Regression in Table 4.9, shows that the probability value calculated

is 0.000<0.05 hence Ho1 was rejected and conclusion made that asset quality significantly

impacts bank performance. Asset quality involves the assessment of bank’s assets with aiming

of understanding the risks each asset possesses. Asset quality ensures that loans are awarded to

credit worth customers who can repay the loan. The assets impacted by asset quality state of

bank include current and fixed and credit portfolio.

Loans are traded by commercial banks to earn interest rate. However, bad loans expose

commercial banks to huge losses. Commercial banks have to keep checking borrowers’

delinquency level because bad loans undermine the creation of equity value to shareholders.

The results concur with Liu (2011) who investigated how CAMEL model impacts performance

of Chinese financial banks and establish that asset quality significantly and negatively impacts

profitability of Chinese commercial banks. In addition, the results agree with Lucky and Nwosi

(2015) that asset quality significantly impacts financial performance of commercial banks

measured using ROE. According to Nazir (2011) asset quality determines bank’s the state of

the loan portfolio quality. However, the results do not agree with Cheruiyot (2015) who showed

46
that asset quality positively influences ROE of commercial banks in Kenya. Bad loans

endanger the liquidity state of a bank a phenomenon that may lead to bank closure and eminent

collapse.

Hypothesis II:

H02: There is no significant relationship between bank size and financial performance of

commercial banks in Kenya.

In addition, model results showed that coefficient of bank size has a positive significant effect

on commercial bank financial performance in Kenya (β=0.097155, p=0.000<0.05). The results

imply that unit increase in the assets controlled by bank results to 0.097155 units the

commercial bank financial performance. Hypothesis testing was checked using p-value

technique. The null hypothesis (Ho2) is rejected if probability-value calculated is less than 0.05,

but Ho2 is not rejected if p-value calculated>0.05. Regression in Table 4.9, shows that the

probability-value calculated is 0.000<0.05 hence Ho2 was rejected and conclusion made that

size of a bank in terms of total assets significantly impacts commercial bank financial

performance.

Large banks stands better chances by their strength in terms of economies of scale in mobilizing

resources, cut down costs, and improve operational efficiency with aim of generating profits.

Though mixed results on the impact of bank size on firm performance are evident. With

considerable economies of scale, bank size can positively impact firm performance. Likewise,

bank size may result to loss because of inefficiency in mobilizing resources. These findings

concur with Jha et al. (2012) studied how financial characteristics impacts profitability of

Nepalese commercial banks and established that size of bank significantly predicted bank

performance measured using ROE. Nonetheless, the output do not agree with Aladwan (2015)

47
noted that smaller banks financially perform better in comparison to large commercial banks.

Thus, the size of a bank in terms of assets it controls is essential in understanding financial

growth and sustainability of financial banks.

Hypothesis III:

H03: There is no significant relationship between Capital Adequacy and financial performance

of commercial banks in Kenya

In the model above, coefficient of capital adequacy positively though insignificant influence

on commercial bank financial performance (β=0.2129, p=0.093>0.05). The results imply that

a unit rise in capital adequacy results to by 0.2129 units increase in the performance of

commercial banks using ROE. The null hypothesis (Ho3) is rejected if probability-value

calculated is less than 0.05, but Ho3 is not rejected if p-value calculated>0.05. Regression

results showed that the p-value calculated is 0.000>0.05 hence Ho3 was not rejected and

conclusion made that capital adequacy is not significantly related to bank performance.

Adequacy of capital is operationalized using capital adequacy ratio (CAR). CAR connotes the

ability of the bank to survive in the event of financial crisis. CAR thus portrays the resilience

of a bank during crisis. It also enables commercial bank expand into new areas of business that

are deemed to be variable.

Capital adequacy decides the capacity of a bank in paying for its liabilities and financial risk

including credit and operational risk. CAR cushions commercial bank against liquidity risk

arising from bad loans. The results concur with Umoru et al. (2016) while studying impact of

capital adequacy on bank performance in Nigeria and found that asset quality significantly

impacts bank performance. Results contrast Trabelsi (2015) who investigated the impact of

liquidity risk on profitability Islamic established that capital adequacy positively and

48
significantly impacts ROA and ROE of Islamic banks. The results also contrast that of Ezra

(2013) that capital adequacy positively and significantly impacts profitability of banks. Capital

adequacy measures bank’s ability to pay for its obligation and cushion itself against precedent

losses. Capital adequacy aims to protect customers money held deposits in the event of eminent

collapse of the bank.

Hypothesis IV:

H04: There is no significant relationship between Operational efficiency and financial

performance of commercial banks in Kenya

Coefficient of operational efficiency positively and significantly affect bank performance

(β=0.14444, p=0.028<0.05). The results imply that a unit improvement in operational

efficiency results to 0.14444 units in bank performance. Regression results showed that the p-

value calculated is 0.028<0.05 hence Ho4 was rejected and conclusion made that operational

efficiency impacts bank performance. High unit expenses among some commercial banks

compel them to seek for greater margins to offset their escalating operational costs. Greater

operational efficiency enables commercial banks lower interest margin by promoting more

deposits through lower loan rate. Operational efficiency is critical in running a healthy

progressive financial institution. It entails prudent utilization of use of firm assets to create

wealth to the stakeholders.

These findings concur with Okoth et al. (2013) in a study on determinants of commercial bank

performance and showed that operational efficiency significantly impacts bank performance.

Also, findings align with Itumo (2013) that operational efficiency significantly and positively

impacts commercial bank’s performance. As per Ndolo (2015), operational efficiency has a

positive relationship with bank performance using ROA as measure of profitability.

49
4.6.1 Impact of Money Supply as moderator on the relationship between liquidity risk

and financial performance of commercial banks

Money supply was employed to moderate effect of liquidity risk factors on commercial bank

financial performance in Kenya. The predictor variables were interacted with money supply to

yield composite function also known as interaction term. Table 4.10 shows results after

introducing the moderator.

Table 4.10: Moderating effect of Money Supply

Variable Coef. Std. Err. z P>z [95% Conf. Interval]

Asset quality* -0.05344 0.009297 -5.75 0.000 -0.07167 -0.03522
Bank size* 0.005365 0.001947 2.76 0.006 0.00155 0.00918
Capital adequacy* 0.02527 0.012348 2.05 0.041 0.04948 0.00107
Operational efficiency* 0.02235 0.00589 3.79 0.000 0.03389 0.0108
_cons 0.65756 0.24998 2.63 0.153 0.084751 0.132392
R-sq: within = 0.5083
between = 0.5744
overall = 0.43623
Wald chi2(4) = 154.37
Prob > chi2 = 0.0000

Table 4.10 shows how money circulation moderates effect of liquidity risk factors on

commercial bank financial performance in Kenya. Coefficient of determination R2 rose from

0.4255 (Table 4.9) to 0.43623 after introducing the moderator. The null hypothesis (H05) that

money supply does not significantly moderate the effect of liquidity risk factors on bank

performance was thus rejected and conclusion made that money circulation in the economy

moderates the relationship between liquidity risk factors and bank performance. The quantity

of the money circulating in the economy is a significant measure of fiscal policies. Nonetheless,

basing on a study by Mulwa (2015), fiscal policy mechanisms shows insignificant impact of

money supply on commercial bank financial performance. Central bank of Kenya plays the

50
role of controlling the money circulating in the market and this acts impacts amount of money

available for loaning among the commercial banks.

Y = 0.65756- 0.05344X1*M + 0.005365X2*M + 0.02527X3*M +0.02235X4*M

Y = Financial performance of commercial banks

X1 = Asset quality

X2 = Bank size

X3 = Capital adequacy

X4 = Operational efficiency

M = Money Supply

β0, β1, β2, β3, β4= model parameter coefficients on the dependent variable as a result of

independent variable changes.

= Error term taking care of other unobserved variations

51
 CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

5.1 Introduction

The chapter highlights the summarized version of the study. Summary of the main result

findings are also presented in this chapter which conclusions were based on. This chapter also

highlights the policy recommendations that bank’s management can adopt to enhance bank

performance. Areas for further research are also highlighted in this chapter.

5.2 Summary of Findings

The first objective determined how asset quality affects financial performance of commercial

banks operating in Kenya. Descriptive output showed that the mean of asset quality is

0.123832. Trend line showed that asset quality declined in 2012/2013 but later rose. Asset

quality entails the assessment of bank’s assets with aiming of understanding the risks each asset

possesses. Correlation results indicated that coefficient of asset quality and commercial bank

financial performance has a negative and significant association. Model results established that

coefficient of asset quality negatively and significantly affect commercial bank financial

performance. Null hypothesis (Ho1) was rejected and conclusion made that asset quality

significantly impacts bank performance.

Second objective was opined to determine how size of a bank influences its profitability. It was

established that average bank size using total assets was KES 76652.23 million. Line graph

showed that bank size in terms of asset growth has been increasing constantly from 2012 to

2017. Correlation output indicated that coefficient of bank size and commercial bank financial

performance are positively and significantly associated. Coefficient of bank size has a positive

significant effect on commercial bank financial performance in Kenya. Null hypothesis (Ho2)

was rejected and conclusion made that bank size significantly impacts bank performance.

52
The third objective was to determine how capital adequacy affects commercial bank financial

performance in Kenya. Average capital adequacy is 0.169182 during the measurement period.

Line graph above shows that capital adequacy declined in 2012/2013, rose in the period

2014/2016 and later declining in the approach to 2017. Coefficient of capital adequacy has a

positive and significant association with commercial bank financial performance using ROE.

Coefficient of capital adequacy positively though insignificant influence commercial bank

financial performance. The null hypothesis (Ho3) was not rejected and conclusion made that

capital adequacy does not impact bank performance.

Forth research objective endeavored in determining how operational efficiency affects

commercial bank financial performance whereas the Average operational efficiency was

0.310406. Line graph showed that operational efficiency declined during the period 2012/2013

but shot up in 2014/2016 and later dropping drastically in the approach of 2017. Coefficient of

operational efficiency and commercial bank financial performance had a positive and

significant association. Model results showed that coefficient of operational efficiency

positively and significantly affect bank performance. The null hypothesis (Ho4) was not rejected

and conclusion made that operational efficiency does not impact bank performance.

The fifth objective assessed how money supply moderates the nexus that exist between

liquidity risk factors and commercial bank financial performance whereas the quantified

average money circulating in the economy was KES 895.9 billion in the study period. Money

supply moderates effect of liquidity risk factors on commercial bank financial performance in

Kenya. The null hypothesis (Ho5) that money supply has no significant moderating effect on

the relationship between liquidity risk factors and financial performance of commercial banks

in Kenya was affirmed.

53
5.3 Conclusions

Several conclusions were drawn from the study findings. The conclusions were based on study

objectives and the findings. The first conclusion was that asset quality negatively influences

bank performance. Asset quality calls for the assessment of bank’s assets with aiming of

understanding the risks each asset possesses. Asset quality can be determined by looking at

loan loss provisions, loan advances and NPLs. Asset quality ensures that loans are awarded to

credit worth customers who can repay the loan.

Another conclusion was that bank size positively impacts bank performance. The efficiency

and effectiveness of a bank in converting assets into profits is linked to the amount of assets it

controls.

It was also concluded that capital adequacy positively affects commercial bank financial

performance. Capital adequacy measures bank’s ability to pay for its obligation and cushion

itself against precedent losses. Capital adequacy aims to protect customers money held deposits

in the event of eminent collapse of the bank. Capital adequacy act as a safety net of protecting

depositors in case the bank collapses or goes out of the market through avoidance and hedging.

The study further concludes that coefficient of operational efficiency has a positive relationship

on financial performance of commercial banks. Operational efficiency connotes the bank’s

ability to effectively mobilize resources to generate profits a bank operating effectively is able

to channel its resources in the right manner increasing revenue generation. Efficient

commercial banks are able to allocate and use their resources effectively in line with business

needs. Operational efficiency determines the solvency state of a bank.

The study further concludes that money supply circulating in the economy impacts the

relationship between liquidity risk factors and bank financial performance. The quantity of the

money circulating in the economy is a significant measure of fiscal policies. Money supply is
54
used as proxies for monetary policy. The CBK through Open Market Operations, engage in

purchasing and selling securities with intention of regulating money circulating the economy.

As CBK purchases the securities, it increases commercial banks money reserves allowing them

to increase the amount of loans available for award.

5.4 Contribution to body of Knowledge

The study showed that total assets controlled by a bank influence its profitability. These

findings supported the postulation of the Liquidity Preference Theory higher interest rate

securities bearing longer time maturity are requested by investors. Investors will also attempt

to hold assets that are easily coverable to liquid money in case need be. In light to liquidity

preference theory, cost of securities become lower when investors are willing to relinquish less

liquid assets.

The findings from the study made further significant contributions to the theory of the firm.

Results showed that operational efficiency influences performance of commercial banks

measured using ROE. The theory of the firm postulates that in order to create firm value,

operational efficiency of the bank is essential in converting assets held into profits through

viable investment business. Firms’ production pattern is influenced by desire for profits. As

such, the profit desire behavior influences firms’ decisions on how to allocate resources to

production. It also influences marketing and pricing techniques of their products. Operational

efficiency of the firm can be enhanced Theory by prudently allocating resources based on

business needs. Firm decisions on how to produce and market its products are guided by profit

desires.

5.5 Recommendations

The study made recommendations for policy, practice and further research.

55
5.5.1 Recommendations for policy

From conclusions of the study several recommendations emanated from the study. First, it was

recommended that commercial banks diversify their investment in other lines of business so as

to expand the income earned. Diversification to of business products may result to expanded

income hence more profits for the firm. Secondly the study recommended that commercial

banks need to prudently allocate and utilize their resources in line with business needs and

objectives. The asset quality negatively impacts bank’s financial performance and therefore

banks need to undertake critical assessment of borrowers on their ability to repay loans before

awarding so as to minimize cases of high nonperforming loans. The credit policies defined and

implemented by the commercial banks need to be aligned to business objectives, level of profits

expected.

The operational efficiency positively affects financial performance. Of commercial banks.

Bank management therefore need to set policies and procedures that encourage and promote a

high level of operational efficiency. The banks can invest on financial technologies to improve

operational efficiency. Therefore, these results imply that bank management should focus and

monitor their operational efficiency and ensure higher operational efficiency. The regulator

should ensure that regulatory prudential guidelines on operational efficiency are adhered to in

order to protect the interest of the investors.

Money supply influences flow of the money in the economy. The CBK of Kenya is responsible

in monitoring flow of money in the economy. It is recommended that CBK need to periodically

assess the money market situation so to decide when to pump more money to the economy or

retract with aim of stabilizing the liquidity of the banking system.

56
5.5.2 Recommendations for practice

The study recommends holding sufficient capital since it is an enhancer of firm profitability.

There should be a wide capital base in the banks to strengthen confidence of depositors. Capital

adequacy act as a safety net of protecting depositors in case the bank collapses or goes out of

the market. Credit functioning system of the bank need to be periodically looked into to ensure

that it correlates with the changing business environment poised by the rise of financial

technologies. Further, the study recommends that that the commercial bank management

should make investment in more assets to ensure that their institutions grow in terms of assets

since large banks enjoy the economies of scale.

Bank management may need to define credit policy frameworks to ensure that customers’

deposits are awarded to worth business investments and customers who stand better position

to repay the principle amount and interest accrued. This is meant to enhance asset quality;

default on the loans awarded to customers is minimized. In addition, sound credit culture need

to be cultivated among customers through financial training and advisory on how to use the

borrowed funds. Improper credit risk management mechanism limits the ability of a bank to

generate more interest income from loans issued out, impacts the quality of assets escalating

loan losses and NPLs resulting to financial distress among the affected banks.

Sustaining strong assets quality entails cautious processing of loans that must be assessed and

compliant to banking loan award policies and regulations. As essential predictor profitability,

poor assets quality impacts the financial performance and the soundness of the credit award

system in the bank. The study therefore recommends implementation of financial technologies

for instance predictive modeling to check credit worthiness of borrowers to ensure that high

value of non-performing loans is minimized. Further, commercial banks need to more put more

effort in minimizing credit risks by enhancing business diversification. Improperly managed

57
credit risks result to rising cases of loan defaults, more cases nonperforming loans that

adversely impact the profitability margins of the commercial banks.

Commercial banks have to work hand to hand with CBK to control flow of money in the

economy. When the Central Bank buys securities on the open market, it increases the reserves

of Commercial banks, making it possible for them to expand their loans which increase

the money supply.

5.5.3 Limitations of the study and Areas for further Research

5.5.3.1 Limitations of the Study

The issue of concern when dealing with secondary sources is the originality of data. The

internet is full of different sets of data from different sources. However, in addressing this, the

scholar made sure that the data for the study is obtained from credible materials such as the

website of the commercial banks for their audited reports. Also, the data may not be in the form

as proposed by the researcher, the researcher proposed the adoption of annual data, therefore

any data in different form was converted to annual data. Research permit was used to seek

authorization in the institutions.

5.5.3.2 Areas for further research

Apart from bank size, capital adequacy, asset quality and operational efficiency, there are other

factors influencing profitability of commercial banks. The factors include management

efficiency and earning ability of a firm. Future research should include this. The study also

relied on ROE as a measure of profitability. ROE often fails to consider the risk of a firm, and

investors/shareholders are more interested in the risk related to particular business investment,

greater than potential expected benefits. Future research should involve measuring profitability

using both Return on Assets (ROA) and Return on Equity (ROE).

58
 REFERENCES

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 APPENDIX 1: LIST OF COMMERCIAL BANKS

1. Victoria Commercial Bank Ltd

2. UBA Kenya Bank Ltd
3. Trans-National Bank Ltd
4. Standard Chartered Bank Kenya Ltd
5. Prime Bank Ltd
6. Paramount Universal Bank Ltd
7. Oriental Commercial Bank Ltd
8. NIC Bank Ltd
9. National Bank of Kenya Ltd
10. Middle East Bank (K) Ltd
11. K-Rep Bank Ltd
12. Kenya Commercial Bank Ltd
13. Jamii Bora Bank Ltd
14. Imperial Bank Ltd
15. I & M Bank Ltd
16. Habib Bank Ltd
17. Habib Bank A.G. Zurich
18. Gulf African Bank Ltd
19. Guardian Bank Ltd
20. Giro Commercial Bank Ltd
21. First Community Bank Ltd
22. Fina Bank Ltd
23. Fidelity Commercial Bank Ltd
24. Family Bank Ltd
25. Equity Bank Ltd 26
26. Equatorial Commercial Bank Ltd
27. Ecobank Kenya Ltd
28. Dubai Bank Kenya Ltd
29. Diamond Trust Bank Kenya Ltd
30. Development Bank of Kenya Ltd
31. Credit Bank Ltd
32. Co-operative Bank of Kenya Ltd
33. Consolidated Bank of Kenya Ltd
34. Commercial Bank of Africa Ltd
35. Citibank N.A. Kenya
36. Chase Bank (K) Ltd
37. CFC Stanbic Bank Ltd
38. Barclays Bank of Kenya Ltd
39. Bank of India
40. Bank of Baroda (K) Ltd a.b.l
41. Bank of Africa Kenya Ltd
42. African Banking Corporation Ltd
Source: (CBK, 2017)

66
APPENDIX II: DATA COLLECTION SHEETS
Capital Operational
adequacy Asset quality efficiency
(core capital (nonperforming (Operating
Bank size divided by loans divided income to
Year Bank in million total Assets) by total loans) total assets) ROE
African Banking
2012 Corporation 19,071 0.19112789 0.1348025 0.37249 26.40%
African Banking
2013 Corporation 19,639 0.19216864 0.1696467 0.60271 23.60%
African Banking
2014 Corporation 21,439 0.13657353 0.0654925 0.47669 12.10%
African Banking
2015 Corporation 22,058 0.14421072 0.1722873 0.46932 12.50%
African Banking
2016 Corporation 22,422 0.10561056 0.1890561 0.39702 7.40%
African Banking
2017 Corporation 24,804 0.1003064 0.2159306 0.15165 6.40%
2012 Bank of Africa 48,958 0.13413538 0.1167217 0.13191 12.70%
2013 Bank of Africa 52,683 0.12913084 0.1281725 0.1601 15.70%
2014 Bank of Africa 42,212 0.14462712 0.0614742 0.29083 2.60%
2015 Bank of Africa 69,280 0.10060624 0.2372246 0.18805 -16.90%
2016 Bank of Africa 50,996 0.10951839 0.2879924 0.14489 -0.20%
2017 Bank of Africa 54,191 0.12817627 0.3147161 0.24375 0.40%
Bank of Baroda (K)
2012 Ltd 46,138 0.12217695 0.0363552 0.23316 28.90%
Bank of Baroda (K)
2013 Ltd 52,022 0.14251663 0.0356744 0.09414 33.10%
Bank of Baroda (K)
2014 Ltd 61,945 0.15052062 0.0367216 0.11971 27.30%
Bank of Baroda (K)
2015 Ltd 68,178 0.16399718 0.0732728 0.10981 22.00%
Bank of Baroda (K)
2016 Ltd 82,907 0.16290542 0.0890534 0.04831 27.20%
Bank of Baroda (K)
2017 Ltd 96,132 0.12840157 0.0606695 0.14199 28.20%
2012 Bank of India 24,877 0.16034892 0.0368472 0.58416 14.90%
2013 Bank of India 30,721 0.16116012 0.0168856 0.43708 24.60%
2014 Bank of India 34,370 0.17171952 0.0057083 0.31541 21.10%
2015 Bank of India 42,163 0.16478903 0.0202526 0.34886 20.50%
2016 Bank of India 47,815 0.17931611 0.0140538 0.18331 22.90%
2017 Bank of India 56,631 0.18832442 0.0209427 0.18769 23.00%
2012 Barclays Bank 185,102 0.15304535 0.0300821 0.22216 44.00%
2013 Barclays Bank 207,010 0.15360611 0.0317142 0.19887 36.80%
2014 Barclays Bank 226,043 0.16802113 0.0355215 0.18907 32.30%
2015 Barclays Bank 241,153 0.14687356 0.0358491 0.13277 30.40%
2016 Barclays Bank 260,429 0.14444253 0.065053 0.11977 24.80%
2017 Barclays Bank 271,682 0.14269624 0.0711811 0.02662 23.00%

67
2012 CFC Stanbic Bank 133,378 0.12771222 0.0045689 0.11295 26.00%
2013 CFC Stanbic Bank 170,726 0.12756112 0.0534784 0.09971 31.30%
2014 CFC Stanbic Bank 171,347 0.14932856 0.0375291 0.10708 27.70%
2015 CFC Stanbic Bank 198,578 0.13033166 0.0469213 0.08578 25.10%
2016 CFC Stanbic Bank 204,895 0.13953856 0.0591899 0.08853 22.90%
2017 CFC Stanbic Bank 239,408 0.13603973 0.0764824 0.01764 16.90%
2012 Citibank, N.A. 69,580 0.24333142 0.047305 0.23104 41.70%
2013 Citibank, N.A. 71,243 0.21659672 0.0045962 0.2218 31.20%
2014 Citibank, N.A. 79,398 0.22156729 0.0358991 0.22614 22.60%
2015 Citibank, N.A. 88,147 0.20928676 0.0638659 0.19809 28.70%
2016 Citibank, N.A. 103,324 0.17885486 0.0285039 0.16383 30.70%
2017 Citibank, N.A. 98,232 0.19379632 0.0452731 0.16633 31.60%
Commercial Bank of
2012 Africa 100,456 0.15640679 0.0401056 0.1728 34.30%
Commercial Bank of
2013 Africa 124,882 0.1311478 0.0383113 0.12711 32.50%
Commercial Bank of
2014 Africa 175,809 0.10112679 0.0406833 0.08565 25.30%
Commercial Bank of
2015 Africa 198,484 0.10126257 0.0438602 0.08572 27.40%
Commercial Bank of
2016 Africa 210,878 0.11403754 0.0708969 0.08254 27.60%
Commercial Bank of
2017 Africa 229,525 0.11499401 0.0728526 0.05723 22.80%
Consolidated Bank of
2012 Kenya 18,001 0.28726182 0.2633941 0.4404 11.20%
Consolidated Bank of
2013 Kenya 16,779 0.2290363 0.213198 0.23278 -11.50%
Consolidated Bank of
2014 Kenya 15,077 0.20481528 0.2610998 0.42877 -17.50%
Consolidated Bank of
2015 Kenya 14,136 0.21830787 0.1928114 0.2756 3.00%
Consolidated Bank of
2016 Kenya 13,918 0.26914787 0.1975312 0.55612 -19.70%
Consolidated Bank of
2017 Kenya 13,456 0.17494055 0.2510625 0.62844 -41.00%
2012 Coop bank 199,663 0.14731823 0.3572344 0.17964 33.10%
2013 Coop bank 228,874 0.14035233 0.3588166 0.18785 30.00%
2014 Coop bank 282,689 0.13252019 0.0440095 0.13556 29.50%
2015 Coop bank 339,550 0.12747165 0.0384982 0.10382 28.50%
2016 Coop bank 349,998 0.14835809 0.0476867 0.11718 30.00%
2017 Coop bank 382,830 0.15374709 0.0741545 0.10437 24.20%
2012 Credit Bank Ltd 6,407 0.18542219 0.0862193 0.69262 6.90%
2013 Credit Bank Ltd 7,309 0.16404433 0.1058626 0.56572 5.90%
2014 Credit Bank Ltd 8,865 0.12543711 0.0995414 0.54934 -7.80%
2015 Credit Bank Ltd 10,287 0.13074755 0.0697076 0.44649 -12.80%
2016 Credit Bank Ltd 12,202 0.198574 0.0808551 0.35673 6.40%

68
2017 Credit Bank Ltd 14,465 0.17932942 0.0862255 0.29101 6.70%
Development Bank of
2012 Kenya 13,417 0.10225833 0.316957 0.29102 6.30%
Development Bank of
2013 Kenya 15,581 0.16385341 0.1145021 0.26902 15.00%
Development Bank of
2014 Kenya 16,954 0.10292556 0.1416631 0.18395 11.50%
Development Bank of
2015 Kenya 16,943 0.10299239 0.2056301 0.27368 6.30%
Development Bank of
2016 Kenya 16,418 0.10585942 0.2572767 0.2937 3.30%
Development Bank of
2017 Kenya 16,320 0.11746324 0.2156863 0.71326 2.00%
Diamond Trust Bank
2012 Kenya 94,512 0.12727484 0.0829532 0.36262 31.40%
Diamond Trust Bank
2013 Kenya 114,136 0.13587299 0.0345437 0.70019 30.00%
Diamond Trust Bank
2014 Kenya 141,176 0.15756928 0.0125869 0.27703 24.50%
Diamond Trust Bank
2015 Kenya 190,948 0.13313049 0.036627 0.16801 23.50%
Diamond Trust Bank
2016 Kenya 244,124 0.12174141 0.0492933 0.48102 24.40%
Diamond Trust Bank
2017 Kenya 270,082 0.13086396 0.0513621 0.0804 19.10%
2012 Dubai Bank Limited 2,584 0.60651471 0.1802941 0.88738 -3.30%
2013 Dubai Bank Limited 3,547 0.28531258 0.1272119 0.59389 1.50%
2014 Dubai Bank Limited 4,510 0.28594777 0.1661073 0.34625 1.34%
2015 Dubai Bank Limited 3,065 0.42068822 0.0368809 0.76411 0.70%
2016 Dubai Bank Limited 3,788 0.61927716 0.2643041 0.46075 3.90%
2017 Dubai Bank Limited 3,788 0.75117635 0.194589 0.57623 -66.10%
2012 Ecobank Kenya Ltd 31,771 0.13767272 0.1849616 0.37739 -76.70%
2013 Ecobank Kenya Ltd 36,907 0.13761617 0.1328162 0.8231 -36.30%
2014 Ecobank Kenya Ltd 45,934 0.11057169 0.1020484 0.67342 -6.40%
2015 Ecobank Kenya Ltd 52,427 0.17325042 0.0790887 0.30588 1.20%
2016 Ecobank Kenya Ltd 47,124 0.14771666 0.1956365 0.80938 -39.50%
2017 Ecobank Kenya Ltd 53,456 0.10788312 0.3862323 0.82886 -22.30%
Equitorial Commercial
2012 Bank 14,109 0.1097172 0.3857816 0.80341 -90.80%
Equitorial Commercial
2013 Bank 15,562 0.14239815 0.3079252 0.90597 11.10%
Equitorial Commercial
2014 Bank 16,589 0.11658328 0.2620511 0.3599 -39.90%
Equitorial Commercial
2015 Bank 14,470 0.11250864 0.3257692 0.32855 -31.70%
Equitorial Commercial
2016 Bank 12,351 0.12695166 0.3414256 0.46789 12.65%
Equitorial Commercial
2017 Bank 14,743 0.12745486 0.3757692 0.40609 -23.43%
2012 equity 215,829 0.13679811 0.035452 0.27146 37.60%

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2013 equity 238,194 0.14592727 0.0480007 0.21958 36.00%
2014 equity 277,116 0.14698899 0.0387049 0.18495 49.40%
2015 equity 341,329 0.13962775 0.0297828 0.14925 47.20%
2016 equity 473,713 0.10818365 ######### 0.13517 43.50%
2017 equity 406,402 0.14566365 ######### 0.03745 37.30%
2012 Family Bank 30,985 0.14907213 0.1044746 0.16321 17.40%
2013 Family Bank 43,501 0.1294453 0.1220902 0.12791 29.50%
2014 Family Bank 61,813 0.16475499 0.0717472 0.09334 24.70%
2015 Family Bank 81,190 0.13953689 0.0606296 0.06397 24.20%
2016 Family Bank 69,432 0.17254292 0.131158 0.08078 5.00%
2017 Family Bank 69,051 0.15686956 0.201969 0.08686 -11.80%
Fidelity Commercial
2012 Bank 11,772 0.1800034 0.1112155 0.45474 8.60%
Fidelity Commercial
2013 Bank 12,779 0.18068706 0.0631684 0.43368 22.40%
Fidelity Commercial
2014 Bank 16,515 0.15446564 0.0774816 0.34614 17.30%
Fidelity Commercial
2015 Bank 15,025 0.15900166 0.1598087 0.39193 -15.90%
Fidelity Commercial
2016 Bank 15,025 0.16346742 0.1236686 0.34588 12.98%
Fidelity Commercial
2017 Bank 14,836 0.11175431 0.0946498 0.3852 -10.65%
2012 First community Bank 9,959 0.10121498 0.376795 0.55198 27.30%
2013 First community Bank 11,305 0.10084034 0.172886 0.48591 16.60%
2014 First community Bank 15,278 0.12586726 0.151952 0.34242 6.70%
2015 First community Bank 14,613 0.10394854 0.2408082 0.40957 0.70%
2016 First community Bank 14,962 0.13119904 0.3230762 0.3478 -2.70%
2017 First community Bank 17,360 0.10985023 0.400091 0.31516 12.70%
2012 Giro Commercial Bank 12,280 0.13794788 0.1614907 0.44067 11.70%
2013 Giro Commercial Bank 13,623 0.14717757 0.2417355 0.39589 18.40%
2014 Giro Commercial Bank 15,082 0.15448879 0.3180662 0.35559 19.50%
2015 Giro Commercial Bank 15,810 0.17172676 0.1972281 0.36769 22.60%
2016 Giro Commercial Bank 16,254 0.18173988 0.1995413 0.31252 19.50%
2017 Giro Commercial Bank 15,715 0.24609443 0.162037 0.31833 17.67%
2012 GTB 14,199 0.84718725 0.0408297 0.38732 7.45%
2013 GTB 25,638 0.16155706 0.0658268 0.22729 6.80%
2014 GTB 32,992 0.14145854 0.0367287 0.17341 9.60%
2015 GTB 29,374 0.17100157 0.044441 0.1902 6.90%
2016 GTB 29,619 0.18440866 0.074077 0.18881 7.90%
2017 GTB 27,628 0.19027798 0.1033755 0.18715 2.80%
2012 Guardian Bank 11,745 0.10378885 0.0795278 0.45343 18.30%
2013 Guardian Bank 12,835 0.11640047 0.0592593 0.4104 25.70%
2014 Guardian Bank 14,571 0.11866035 0.0764449 0.39367 21.50%
2015 Guardian Bank 14,609 0.13580669 0.1036671 0.37073 16.60%

70
2016 Guardian Bank 14,705 0.14614077 0.0819443 0.36933 13.60%
2017 Guardian Bank 15,803 0.17445972 0.1089003 0.34844 9.60%
2012 Gulf African Bank 13,562 0.10927592 0.10387 0.4185 23.90%
2013 Gulf African Bank 16,054 0.16618911 0.1039819 0.36482 16.10%
2014 Gulf African Bank 19,754 0.15470284 0.0734291 0.27634 19.50%
2015 Gulf African Bank 24,714 0.15687465 0.0881241 0.2053 28.20%
2016 Gulf African Bank 27,156 0.1560981 0.0969089 0.21347 17.20%
2017 Gulf African Bank 31,316 0.16946609 0.0973987 0.17785 5.70%
2012 Habib AG Zurich 9,702 0.15017522 0.0207947 0.58349 26.90%
2013 Habib AG Zurich 11,009 0.16032337 0.0197119 0.49438 25.70%
2014 Habib AG Zurich 12,147 0.17938586 0.0243973 0.46383 28.60%
2015 Habib AG Zurich 14,440 0.17278393 0.0217677 0.3721 19.80%
2016 Habib AG Zurich 17,033 0.17072741 0.0294701 0.29616 21.00%
2017 Habib AG Zurich 18,708 0.148065 0.1042254 0.32004 14.40%
2012 Habib Bank Limited 7,014 0.18733961 0.0894843 0.74045 33.80%
2013 Habib Bank Limited 8,078 0.19844021 0.0998467 0.69522 30.00%
2014 Habib Bank Limited 9,449 0.19536459 0.0726577 0.56133 27.40%
2015 Habib Bank Limited 10,230 0.18142717 0.1016155 0.51136 22.60%
2016 Habib Bank Limited 12,508 0.17101055 0.1371578 0.41906 20.10%
2017 Habib Bank Limited 14,786 0.1517568 0.1018497 0.39377 25.03%
2012 Housing finance 40,686 0.10271346 0.0784795 0.13901 17.50%
2013 Housing finance 46,755 0.12820019 0.0635705 0.11292 21.40%
2014 Housing finance 60,491 0.14083087 0.1028102 0.0869 20.89%
2015 Housing finance 68,809 0.11764449 0.0750037 0.07403 24.40%
2016 Housing finance 68,085 0.12512301 0.1090594 0.07836 14.80%
2017 Housing finance 62,127 0.13356512 0.1560327 0.08298 3.90%
2012 I & M Bank 91,520 0.12961101 0.0580708 0.06532 28.50%
2013 I & M Bank 110,316 0.13325356 0.0277797 0.0536 29.50%
2014 I & M Bank 137,299 0.13927268 0.0209844 0.04152 35.50%
2015 I & M Bank 147,846 0.15934824 0.048628 0.0383 32.00%
2016 I & M Bank 159,256 0.15500233 0.10670 0.01607 27.60%
2017 I & M Bank 183,953 0.16194354 0.85646 0.01097 21.50%
2012 Jamii Bora Bank 3,480 0.38074713 0.0608424 0.42721 2.50%
2013 Jamii Bora Bank 7,010 0.19914408 0.1217522 0.72878 4.00%
2014 Jamii Bora Bank 13,118 0.1674798 0.0931312 0.44264 3.10%
2015 Jamii Bora Bank 16,782 0.13025861 0.0722578 0.30581 1.20%
2016 Jamii Bora Bank 15,724 0.17082167 0.2039576 0.33544 -13.70%
2017 Jamii Bora Bank 12,851 0.17765154 0.212106 0.44895 -22.00%
2012 kcb 304,112 0.13851805 0.0453333 0.18701 29.80%
2013 kcb 323,312 0.15744853 0.0610211 0.14742 28.40%
2014 kcb 376,969 0.15334152 0.0519349 0.15705 31.00%
2015 kcb 467,741 0.11994458 0.0594818 0.12768 29.00%

71
2016 kcb 504,778 0.14384749 0.0759541 0.11527 35.20%
2017 kcb 555,630 0.12952864 0.0830333 0.02384 30.90%
Middle East Bank of
2012 Kenya 5,870 0.18381601 0.3120034 0.96489 4.20%
Middle East Bank of
2013 Kenya 5,766 0.19736386 0.3839496 0.6556 6.90%
Middle East Bank of
2014 Kenya 5,937 0.20498568 0.3000807 0.89446 6.20%
Middle East Bank of
2015 Kenya 5,678 0.21961958 0.2726366 0.91243 3.40%
Middle East Bank of
2016 Kenya 5,234 0.22411158 0.2971542 0.69465 -8.50%
Middle East Bank of
2017 Kenya 5,121 0.22319859 0.4435534 0.54083 -3.60%
2012 National Bank(NBK) 67,155 0.14328047 0.0904992 0.08758 11.00%
2013 National Bank(NBK) 92,493 0.11148952 0.1028637 0.06421 15.00%
2014 National Bank(NBK) 122,865 0.1248769 0.1062811 0.04267 19.20%
2015 National Bank(NBK) 125,295 0.11001237 0.1614728 0.04083 -15.40%
2016 National Bank(NBK) 125,295 0.10401852 0.4370281 0.04768 1.50%
2017 National Bank(NBK) 109,942 0.13191501 0.4058222 0.05063 10.50%
2012 NIC 101,772 0.15212064 0.0682358 0.23325 28.60%
2013 NIC 121,063 0.14512232 0.0669618 0.12703 29.60%
2014 NIC 145,781 0.1601772 0.0609181 0.13694 26.90%
2015 NIC 156,762 0.13733558 0.1185684 0.1574 23.70%
2016 NIC 161,847 0.15681477 0.1124354 0.13657 19.60%
2017 NIC 192,817 0.14341059 0.1119797 0.11642 19.60%
2012 Oriental Comm. Bank 6,220 0.18311897 0.064021 0.76253 8.20%
2013 Oriental Comm. Bank 7,007 0.18781219 0.0543735 0.39573 11.70%
2014 Oriental Comm. Bank 7,858 0.17650802 0.1087042 0.6627 5.30%
2015 Oriental Comm. Bank 8,496 0.23905367 0.1488714 0.45015 1.90%
2016 Oriental Comm. Bank 9,920 0.27197581 0.1204157 0.3881 1.20%
2017 Oriental Comm. Bank 10,577 0.26283445 0.1045085 0.45235 3.80%
Paramount-Universal
2012 Bank 7,255 0.15244659 0.166261 0.51442 7.90%
Paramount-Universal
2013 Bank 8,029 0.1463445 0.2328587 0.36049 8.10%
Paramount-Universal
2014 Bank 10,402 0.13333974 0.1402858 0.29066 9.90%
Paramount-Universal
2015 Bank 10,526 0.13775413 0.1256746 0.53951 11.00%
Paramount-Universal
2016 Bank 9,427 0.16495173 0.1246226 0.33307 6.40%
Paramount-Universal
2017 Bank 9,541 0.16298082 0.1226162 0.53095 5.50%
2012 Prime Bank Limited 43,463 0.13381497 0.0963108 0.05232 27.80%
2013 Prime Bank Limited 49,461 0.10009907 0.0348086 0.0681 32.50%
2014 Prime Bank Limited 54,918 0.12240067 0.018996 0.0782 29.70%

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2015 Prime Bank Limited 65,001 0.12847495 0.0237643 0.04312 29.70%
2016 Prime Bank Limited 65,338 0.14908629 0.0461787 0.03231 21.60%
2017 Prime Bank Limited 76,438 0.14621 0.0566356 0.0762 13.80%
2012 Sidian Bank 9,546 0.14864865 0.1019258 0.33879 20.10%
2013 Sidian Bank 13,199 0.13773771 0.0915648 0.44768 29.80%
2014 Sidian Bank 15,799 0.14792075 0.0691992 0.21347 30.00%
2015 Sidian Bank 19,107 0.19657717 0.1207479 0.24033 13.50%
2016 Sidian Bank 20,875 0.18131737 0.1697287 0.26364 1.60%
2017 Sidian Bank 19,302 0.17226194 0.2105434 0.3104 -18.40%
Standard Chartered
2012 Bank Ltd 195,493 0.11060754 0.0544884 0.09454 37.60%
Standard Chartered
2013 Bank Ltd 220,524 0.11713464 0.0965933 0.11352 37.00%
Standard Chartered
2014 Bank Ltd 222,636 0.13000593 0.083499 0.10482 35.40%
Standard Chartered
2015 Bank Ltd 234,131 0.14205295 0.1195883 0.10121 21.90%
Standard Chartered
2016 Bank Ltd 264,073 0.13351606 0.1134979 0.10342 29.10%
Standard Chartered
2017 Bank Ltd 285,125 0.12495572 0.1218345 0.0688 21.30%
Transnational Bank
2012 Limited 8,801 0.20338598 0.0709147 0.29158 17.60%
Transnational Bank
2013 Limited 9,658 0.18709878 0.1158958 0.21455 12.00%
Transnational Bank
2014 Limited 10,240 0.17714844 0.0800424 0.36248 10.00%
Transnational Bank
2015 Limited 10,533 0.18304377 0.0998774 0.41421 12.40%
Transnational Bank
2016 Limited 10,465 0.18815098 0.1268084 0.22396 7.70%
Transnational Bank
2017 Limited 10,295 0.18339 0.2165648 0.51146 2.50%
2012 UBA BANK 2,924 0.41552668 0.0608466 0.37599 -32.60%
2013 UBA BANK 3,710 0.28544474 0.0358543 0.61289 -26.20%
2014 UBA BANK 4,756 0.23696384 0.066242 0.62278 -29.10%
2015 UBA BANK 7,781 0.14226963 0.0207885 0.51513 -27.20%
2016 UBA BANK 5,601 0.38046777 0.022068 0.99174 2.30%
2017 UBA BANK 6,505 0.33235972 0.0459353 0.37388 0.60%
Victoria Comm. Bank
2012 Ltd 10,323 0.19558268 0.0884905 0.44927 24.10%
Victoria Comm. Bank
2013 Ltd 13,644 0.16857227 0.1114186 0.28456 23.20%
Victoria Comm. Bank
2014 Ltd 17,244 0.15164695 0.0409873 0.27554 22.10%
Victoria Comm. Bank
2015 Ltd 20,020 0.16693307 0.0429747 0.23826 19.30%
Victoria Comm. Bank
2016 Ltd 22,403 0.21644423 0.0085007 0.21524 15.70%

73
 Victoria Comm. Bank
2017 Ltd 25,985 0.2063883 0.0090009 0.14959 15.10%
2012 Fina Bank Limited 17,150 0.16612708 0.1606776 0.30596 13.90%
2013 Fina Bank Limited 15,768 0.24849343 0.1545223 0.32362 13.45%
2014 Fina Bank Limited 18,355 0.11529616 0.2737725 0.29832 7.34%
2015 Fina Bank Limited 15,988 0.14126324 0.1212406 0.31569 12.67%
2016 Fina Bank Limited 14,988 0.15898858 0.2786246 0.37625 9.23%
2017 Fina Bank Limited 16,868 0.15271177 0.2802034 0.31684 13.67%

74