Abstract
The performance of banks in Kenya has become a major concern for economics and policy makers due to the role of banks remaining central in financing economic activities. The study sought to establish the effect of bank size and financial risk exposure on financial performance of commercial banks in Kenya. The descriptive research design and a positivist approach were adopted. The Berger and Hannan approach was used to establish the relationship between bank size, financial risk exposure and the moderating effect of macroeconomic variable on the financial performance of commercial banks in Kenya. Various diagnostic tests were carried out and the study data structure was panel hence Stata was employed to determine the relationship between the variables. In conclusion, banks need to grow bank sizes where they enjoy both economies of scale and scope. The Kenyan Treasury should design policies that would increase the capital size, liquidity requirements and deposit insurance premiums; this may assist in enlarging the size of banks to a level where they are fairly equal with none having relative market power to drive the market. Areas of further research may include but not limited to considering other variables besides the financial risk exposure and bank size in determining their effect on the financial performance of commercial banks in Kenya. The research may as well be done in the East African or African context. The further studies should seek to leverage on mixed research approaches that utilize both quantitative and qualitative research.
Highlights
The financial performance analysis of commercial banks has been of great interest to academic research since the Great Depression Intern in the 1940’s
This study focused on assessing functional relationship between the bank size, financial risk exposure and resultant financial performance and it was guided by the Market Power and the Efficiency Structure Theories which has been treated within the framework of Structure-Conduct-Performance paradigm
The results indicate that bank size is positive; this implies that bank size plays a major role in impacting on the financial performance of commercial banks in Kenya
Summary
The financial performance analysis of commercial banks has been of great interest to academic research since the Great Depression Intern in the 1940’s. The other possible reason for the high profitability in commercial banking business in SSA is the existence of a huge gap between the demand for bank service and the supply thereof. In SSA the number of banks are few compared to the demand for the services; as a result, there is less competition and banks charge high interest rates. This is especially true in East Africa where the few government owned banks take the lion's share of the market. In Kenya, the banking industry has experienced major transformations over the past decades of deregulation and the globalization of financial markets. The stability of the banking industry is of paramount importance to the financial system as it plays an imperative role in the operation of an economy
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