Effect of Firm Characteristics on Financial Performance of Listed Commercial Banks in Kenya

Abstract

A country's economy relies majorly on the banking sector. This study examined the effect of firm characteristics on financial performance with a focus on listed banks in the Nairobi Securities Exchange for the period from 2010 to 2018. The bank characteristics examined were: Capital adequacy, leverage, asset quality and bank size. The collected data was analyzed using STATA 11 and this was basically descriptive, correlation and regression analysis. The findings depicted a significant positive effect of capital adequacy on both returns on equity (ROE) and returns on assets (ROA). The findings further indicated a significant negative effect of asset quality on ROE but an insignificant negative effect on ROA. On leverage, the findings indicated a significant positive effect on ROE and an insignificant positive effect on ROA. The findings of this study indicated that bank size has a significant positive effect on both ROE and ROA. This study concluded that capital adequacy and bank size have a significant positive effect on performance. There were mixed findings on the effect of asset quality and leverage on performance. The study recommended that, listed commercial banks should maintain a considerable capital adequacy to be able to effectively absorb losses emanating from economic shocks.

Credit Risk Assessments and Firm Value of Listed Commercial Banks in Kenya

“…Graph 1 presents the findings on1the descriptive statistics1for capital Adequacy for1the years 2009-2020. These findings confirm those by Nyabaga and Matanda [1] research which found that adequacy of capital is a crucial indicator that helps banks to evaluate their strategies for risk reduction that companies can adopt to improve their efficiency in a given economy. The study shows that capital adequacy determines the performance of firms in each area because they are closely linked.…”

“…Bhattarai [12] realized that the capital adequacy ratio (CAR) and financial performance are significantly related. While Nyabaga and Matanda [1] showed a substantial positive effect on the ROE and capital adequacy, Kaol [25] suggests that the higher the capital adequacy level that an entity has, the lower the institution's financial output and Bhattarai [12] revealed that the capital adequacy ratio (CAR) is closely correlated with the financial performance of commercial banks in Nepal. Udom and Eze [3] research findings suggest that the appropriateness of capital has a positive effect on the financial performance of banking institutions while Musyoka [26] concludes that capital adequacy in has a negative and significant on financial performance of commercial banks in Kenya, Kamande et al [24] showed that capital adequacy ratio is directly proportional to the bank's stability in circumstances of crisis.…”

“…However, Kaol [25] research indicates that the higher the capital adequacy ratio an entity has, the lower the institution's financial performance. However, the outcomes of Nyabaga and Matanda [1] research suggests major positive impacts on equity and asset returns of capital adequacy while Boateng [6] found capital adequacy as positively influencing the efficiency of Ghanaian banks.…”

“…Banks perform an incredibly important role in the overall economic growth of a country because they have tremendous influence over the provision of money and are therefore essential catalyst for economic change [1]. In the banking industry, commercial banks make up an integral part of the financial system worldwide [2].…”

Assessing effects of Interest Rates Spread on Non-Performing Loans: A Case of Commercial Banks in Trans-Nzoia County, Kenya

“…While Nyabaga and Matanda [26] show that capital adequacy and bank size have a strong positive impact on outcomes Musa and Nasieku [27] revealed that the credit efficiency of CBs in Kenya has had a substantial and beneficial effect as better capital adequacy ratios result in greater loan returns. Mananda [28] research findings reveal that financial performance are associated with capital adequacy oppositely and significantly with commercial banks.…”