Determinants of financial performance: empirical evidence from commercial banks in Kenya with the moderating role of digitalisation

Abstract

The financial performance of commercial banks is a key driver of economic stability and growth in developing economies such as Kenya. This study examines the determinants of financial performance among Kenyan commercial banks, focusing on bank-specific factors, industry-specific factors, macroeconomic factors, and the moderating role of digitalisation. The analysis is grounded in the Efficiency Structure Theory, Deflation Theory, and Market Power Theory, which explain how operational efficiency, macroeconomic conditions, and market structure influence bank profitability. Guided by a positivism philosophy and an explanatory research design, the study utilises panel data from all 39 commercial banks regulated by the Central Bank of Kenya over the period 2000–2024. Secondary data from central bank reports and audited financial statements are analysed using hierarchical panel regression in Stata 18.5, with robustness confirmed through diagnostic tests including stationarity, Chow, normality, multicollinearity, heteroskedasticity, autocorrelation, and Hausman specification tests. Findings indicate that bank size is a strong and consistent determinant of performance (ROA, ROE, NIM), reflecting economies of scale. Asset quality negatively affects profitability, while liquidity exerts a modest positive effect, particularly on ROE, and capital adequacy is largely insignificant. At the industry level, market concentration enhances NIM, whereas private sector credit reduces ROE and NIM, suggesting margin compression associated with increased lending. Macroeconomic results show that GDP growth and moderate inflation support performance, while exchange rate depreciation weakens it; interest rates primarily influence NIM. Digitalisation emerges as a significant positive determinant across all measures and strengthens the effect of bank size, underscoring its role in improving efficiency and competitiveness. Overall, the models explain approximately 45–50% of the variation in financial performance. This study contributes by integrating conflicting empirical evidence on the determinants of commercial bank performance in Kenya through a multidimensional framework encompassing bank-specific, industry-specific, macroeconomic, and digitalisation factors. Using panel data and hierarchical regression with robust diagnostics, it provides new evidence on the moderating role of digitalisation. The findings extend efficiency and market power frameworks and offer practical implications for bank strategy and policy, while highlighting the need for future research incorporating qualitative factors and cross-country analysis.