Effect of Macroeconomic Factors on Financial Performance of Commercial Banks in Kenya

Abstract

The Kenyan banking industry plays a vital role in economic development of the country. However, performance in the banking sector has not be satisfactory given that there are commercial banks that have collapsed while others are under receivership or operating under statutory management. In light of this fact, the purpose of the study was to investigate the effect of macroeconomic factors on financial performance of commercial banks in Kenya. The study was informed by the following objectives: to determine the effect of exchange rate on financial performance of the commercial banks in Kenya; to establish the effect of real Gross Domestic Product on financial performance of the commercial banks in Kenya; to assess the effect of inflation rate on financial performance of commercial banks in Kenya; and to determine the effect of real interest rate on financial performance of the commercial banks in Kenya. The study utilized a causal research design and carried out a census of all the 35 commercial banks that were fully operational for the period 2011-2019. The study used secondary data, which was extracted from the Central Bank of Kenya, Kenya National Bureau of Statistics, and banks’ audited financial statements. Both descriptive and inferential statistics were used in data analysis. Panel regression model was used to establish the effect of macroeconomic factors on financial performance of commercial banks in Kenya. Presentation of data was aided by tables and diagrams. The findings of the study showed that exchange rate and interest rate significantly affected financial performance of commercial banks in Kenya. On the other hand, GDP growth rate and inflation rate did not significantly affect financial performance of commercial banks in Kenya. The study concluded that exchange rate and interest rate affected financial performance of commercial banks. Conversely, the study concluded that financial performance of commercial banks in Kenya was not affected by GDP and inflation rate. The study recommends that policy formulation in the banking sector should take into consideration the exchange rate as the basis of managing its effect on financial performance. Moreover, the study recommends that commercial banks should moderately raise their interest rates in the quest to increase profitability in the banking industry.