Determining the impact of select macroeconomic variables and bank-specific determinants on the profitability of commercial banks in Kenya

Abstract

This study seeks to evaluate how internal factors (bank-specific determinants) and external factors (macroeconomic variables) influence the financial performance (profitability) of commercial banks in Kenya. The select macroeconomic variables include Gross Domestic Product, Inflation rate, Exchange rate and Real interest rates. The select bank-specific determinants include capital adequacy, asset quality and liquidity. The study employs panel data approach to obtain empirical findings in line with the objectives. Moreover, the study utilizes correlation and regression analysis to identify the impact of each independent variable on commercial bank profitability. Fixed and random effects, together with various diagnostic tests, such as serial correlation, unit root stationarity, multicollinearity and cross-sectional dependency, are employed to evaluate the characteristics of the data for the commercial banks listed at the Nairobi Stock Exchange as at 2013. Moreover, the period under consideration will the period 2013 to 2023. Furthermore, the study employs an unbalanced panel data so as to obtain empirical findings in line with the research objectives and hypothesis; commercial bank profitability is influenced by the select macroeconomic variables and bank-specific determinants. In addition, the profitability metrics to be employed in this study will be Return on Assets (ROA). Moreover, the study utilizes secondary data and various sources such as annual reports from the Central Bank of Kenya, bank supervision reports, economic surveys and statistical abstracts from the Kenya National Bureau of Statistics will be employed. The study found that asset quality, interest rates and exchange rates were significant factors affecting profitability of commercial banks in Kenya. The study therefore concludes that banks should focus on effective risk management strategies, prioritize high quality assets, develop pricing strategies that maximize on favourable interest rate movements and formulate and implement robust foreign exchange management strategies.