EFFECT OF SELECT MACRO ECONOMIC VARIABLES ON PERFORMANCE OF LISTED COMMERCIAL BANKS IN KENYA
Edna Mwende Gikombo - Masters of Business Administration (Finance Option), Jomo Kenyatta University of Agriculture and Technology, Kenya
Dr. Mbugua Doris - Jomo Kenyatta University of Agriculture and Technology, Kenya
ABSTRACT
Profitability of financial institutions is a function of many variables including economic variables and institution based factors. Each institution may have control on the internal factors but not the economic factors. The general objective of this study was to determine the effect of selected economic variables on profitability of commercial banks in Kenya. The specific objectives of the study include: examining the effect of real interest rates on profitability of commercial banks in Kenya; determining the effect of Gross domestic product on profitability of commercial banks in Kenya; evaluating the effect of exchange rates on profitability of commercial banks in Kenya; and determining the effect of inflation on profitability of commercial banks in Kenya. The study used descriptive research design to obtain information that describes what exists with respect to the variables tested while the longitudinal design helped track changes over time. The study focussed on all the licensed 44 commercial banks in Kenya as at December 2016. All the 44 commercial banks were included in the study hence a census. The study used secondary data and utilized a data collection form to collect as used in various previous research projects. Descriptive statistics, inferential statistics were conducted using the SPSS version 23.0 and the findings were presented in the form of tables. The analyzed findings indicated that when ROA was used as a measure of profitability of commercial banks; real interest rate (p=0.039), GDP (p=0.003), exchange rate (p=0.002) and inflation (p=0.004) all had p values less than 0.05. When ROE was used as a measure of performance, real interest rates (p=0.002<0.05), GDP (p=0.000<0.05) and Exchange rates (p=0.003<0.05) were all significant factors affecting profitability of commercial banks as their p values were less than 0.05. The study concludes that real interest rate significantly affected Return on Assets and Return on Equity as measures of profitability of commercial banks. Compared to other variables, GDP had the largest effect on profitability of commercial banks. In comparison to other variables, exchange rates however had least effect on profitability of commercial banks. Inflation only had significant effect on ROA as a measure of profitability of commercial banks. The study recommends that regulatory bodies like Central Bank of Kenya should work closely with the National Treasury to implement sound policies and measures of maintain interest rates in the economy. The National Government should adequately support all the sectors of the economy in order to grow the GDP of each of these sectors. Adequate measures and policies, strategies and measures should be formulated to check the level of foreign exchange. Proper fiscal and monetary policies should be enforced to control the level of inflation in an economy.
