Effect Of Bank Size And Financial Risk Exposure On Financial Performance Of Commercial Banks In Kenya

ABSTRACT

The study sought to establish the effect of bank size and financial risk exposure on financial performance of commercial banks in Kenya. The specific objectives of the study were: to determine the effect of bank size on financial performance of commercial banks in Kenya; to establish the effect of financial risk exposure on financial performance of commercial banks in Kenya; to determine the moderating effect of macroeconomic variable on bank size and financial performance of Commercial Banks in Kenya; and to determine the moderating effect of macroeconomic variable on financial risk exposure and financial performance of Commercial Banks in Kenya. Studies on bank size and financial risk exposure have presented mixed results and they have not been conclusive on how they affect financial performance. Despite the empirical evidence cited demonstrating that it is possible to conduct a meaningful analysis of financial performance, the major conclusion is that most models focus on a single variable instead of a set of variables. The study factored in bank size and financial risk exposure variables and it was done in the Kenyan context so as to determine the effect of bank size and financial risk exposure on financial performance of banks in Kenya. The descriptive research design and a positivist approach were adopted. The Berger and Hannan approach was used establish the relationship between bank size, financial risk exposure and the moderating effect of macroeconomic variable on the financial performance of commercial banks in Kenya. All the 43 commercial banks were used during the study. Secondary data was obtained from Kenya Bankers Association and Central Bank of Kenya’s comprehensive archive of financial data for the 43 commercial banks for the period 2009 to 2015. Various diagnostic tests were carried out to and the study data structure was panel hence Stata was employed to determine the relationship between the variables. Under financial performance, average return on assets in Kenya is consistent with average return on assets in Sub-Saharan Africa implying that Commercial Banks’ return on assets in Kenya is about average of Sub-Saharan Africa. The results indicate that bank size plays a major role in impacting on the financial performance of commercial banks in Kenya. The results also imply that the main source of financial performance in the Kenyan banking industry is as a result of structure or collusive power. Under financial risk exposure, market risk has minimal effect on financial performance of commercial banks in Kenya. This means that the overall market movement in the financial market has minimal impact on the financial performance in the banking industry. The Kenya GDP growth rate shows a minimal effect on the relationship between bank size and financial risk exposure on the financial performance of commercial banks in Kenya. In conclusion, banks need to grow bank sizes where they enjoy both economies of scale and scope. Treasury should design policies that will increase the capital size, liquidity requirements and deposit insurance premiums; this may assist in enlarging the size of banks to a level where they are fairly equal with none having relative market power to drive the market. Areas of further research may include and not limited to considering other variables besides the financial risk exposure and bank size in determining their effect on the financial performance of commercial banks in Kenya. The research may as well be done in the East African or African context. The further studies should seek to leverage on mixed research approaches that utilize both quantitative and qualitative research.