Effect of Management Efficiency on Financial Performance of Commercial Banks in Kenya

Abstract

Performance of commercial banks has critical implications for economic growth of countries. The Kenyan banking sector remained resilient on the backdrop of turbulence, characterized by interest rate capping in 2015 and the prolonged electioneering period in 2017 which brought uncertainties in the banking sector. This study investigated the effect of management efficiency on financial performance of commercial banks in Kenya. Efficient market hypothesis and modern portfolio theory guided the study. The study adopted an explanatory research design. The study used 2009-2018 secondary consolidated panel data of 40 commercial banks from Central Bank of Kenya and International Monetary Fund. Time series econometric procedures of co-integration and Vector Error Correction model (VECM) were used so as to determine nature of the time series data and equilibrium relation between the variables. The VECM estimation results identified a significant short run and long run equilibrium relation between coefficient of management efficiency and financial performance of commercial banks in Kenya. The Coefficient of Management Efficiency was 0.2359, p=0.008 < 0.05. The coefficients of management efficiency were positive and significant at 5% level. This implied that for every unit increase in coefficient management efficiency would increase by 0.2359 units of financial performance of commercial banks in Kenya respectively in the long run. The findings indicated a significant co-integration relation between management efficiency and finance performance of commercial banks in Kenya. The VECM results also indicated that management efficiency and financial performance have a long run equilibrium during the study period. Managerial policies and strategies that are cost effective and productive efficient could raise the managerial efficiency and financial performance of banks. Based on the findings the study recommended that banks put a lot of focus on their own internal processes since management efficiency, had positive influence on their profitability policies.