Analysis of factors influencing the profitability of listed commercial banks in kenya

ANALYSIS OF FACTORS INFLUENCING THE PROFITABILITY OF LISTED COMMERCIAL BANKS IN KENYA BY OMWANDO ROBERT 1022602 A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION (MBA) – FINANCE OPTION GRADUATE BUSINESS SCHOOL FACULTY OF COMMERCE THE CATHOLIC UNIVERSITY OF EASTERN AFRICA JULY, 2017 ii ACKNOWLEDGEMENT I am thankful and grateful to the almighty God for his strength, grace and protection throughout my studies The success and completion of this work has been the effort of many and in a special way I thank my parents Mr and Mrs Patrick and Victoria Aminga for their full support throught my studies and my project; to my siblings Priscah, Violet, Emmah and Haron Aminga for the encouragement My special thanks also goes to my supervisors Prof Alloys Ayako and Dr Thomas Githui for their comments, encouragement, Patience and tireless guidance which have been of great assistance throughout my research I also recognize the good supportive team I have had with all my friends I recognize the efforts and dedication of my lectures throughout my studies I humbly extend my gratitude and appreciation to you all I feel privileged to share the success of my work with you all iii DEDICATION To my parents; Patrick and Victoria Aminga who are my daily reminders that I can be whatever I want to be in this life May the almighty always protect and bless you iv TABLE OF CONTENTS DECLARATION ERROR! BOOKMARK NOT DEFINED ACKNOWLEDGEMENT III DEDICATION IV LIST OF TABLES VIII LIST OF FIGURES IX LIST OF ABBREVIATIONS X ABSTRACT XI CHAPTER ONE INTRODUCTION 1.1 BACKGROUND OF THE STUDY 1.2 STATEMENT OF THE PROBLEM 1.3 RESEARCH QUESTIONS 1.4 SIGNIFICANCE OF THE STUDY 1.5 SCOPE AND DELIMITATION OF THE STUDY 1.6 CONCEPTUAL FRAMEWORK 1.7 OPERATIONALIZATION OF VARIABLES 1.8 ORGANIZATION OF THE STUDY CHAPTER TWO LITERATUREREVIEW 2.1 THEORETICAL REVIEW 2.1.1 Bank Profitability Hypothesis 2.1.2 Structure Conduct Performance (SCP) Hypothesis 2.1.3 Efficient – Structure Hypothesis (ESH): 2.1.4 Expense – Preference Hypothesis (EPH) 10 2.2 BANK PERFORMANCE INDICATORS 10 2.2.1 Return on Equity (ROE) 11 v 2.2.2 Return on Asset (ROA) 11 2.2.3 Net Interest Margin (NIM) 12 2.3 DETERMINANTS OF BANK PERFORMANCE 12 2.3.1 Bank Specific Factors/Internal Factors 13 2.4 THE EFFECTS OF MARKET STRUCTURAL FACTORS ON BANK PROFITABILITY 18 2.4.1 Ownership and its Effects on Profitability 18 2.4.2 Market Concentration and its Effect on Profitability 19 2.5 EXTERNAL FACTORS/ MACROECONOMIC FACTORS 20 2.6 FACTORS CONSIDERED WHEN DETERMINING INTEREST RATES 20 2.7 CAUSES OF HIGH INTEREST RATES AND EXCESSIVE BANK CHARGES 22 2.8EMPIRICAL LITERATURE 22 2.9LITERATURE GAP 27 CHAPTER THREE 28 RESEARCH METHODOLOGY 28 3.1 INTRODUCTION 28 3.2 RESEARCH DESIGN 28 3.3 TARGET POPULATION 28 3.4 SAMPLE AND SAMPLING TECHNIQUES 29 3.5 DATA COLLECTION INSTRUMENTS AND PROCEDURES 29 3.6 DATA PRESENTATION AND ANALYSIS 29 3.6.1 Analytical Model 29 3.6.2 Test of Significance 30 3.7 TESTING FOR MODERATION 30 CHAPTER FOUR 33 PRESENTATION, DISCUSSION AND INTERPRETATION OF EMPIRICAL FINDINGS 33 4.1 INTRODUCTION 33 4.2 TREND OF PERFORMANCE OF KENYA’S LISTED COMMERCIAL BANKS 33 4.3 INFERENTIAL STATISTICS 35 vi 4.3.1 Model Summary 35 4.3.2ANOVA (Analysis of Variance) 35 4.3.3 Regression analysis results 36 4.4INTERPRETATION OF THE FINDINGS 38 4.4.1 The moderating effect of bank Size 40 4.5 ENHANCING THE PERFORMANCE OF KENYA’S LISTED COMMERCIAL BANKS 44 CHAPTER FIVE 45 SUMMARY, CONCLUSIONS AND RECOMMENDATIONS 45 5.1 INTRODUCTION 45 5.2 SUMMARY OF KEY FINDINGS 45 5.3 CONCLUSIONS 46 5.4 RECOMMENDATIONS 47 5.5 LIMITATIONS OF THE STUDY 47 5.6 SUGGESTED AREAS FOR FURTHER RESEARCH 48 REFERENCES 49 APPENDIX I LISTED COMMERCIAL BANKS AT THE NSE 56 APPENDIX II: DATA ANALYSIS OUTPUT FROM SPSS 57 vii LIST OF TABLES Table 1.1 Operationalization of Variables Table 4.2 Model summary 35 Table 4.3 Coefficient of Correlation 36 viii LIST OF FIGURES Figure 1.1 analyzing the relationship between dependent and independent variables .6 Figure 4.2 Trend of performance of Kenya’s listed commercial banks 34 Figure 4.3 ANOVA (Analysis of Variance) 36 ix REFERENCES Abdullah, M N., Parvez, K., & Ayreen, S (2014) Bank Specific, Industry Specific and Macroeconomic Determinants of Commercial Bank Profitability: A Case of Bangladesh Dhaka Business World, 4(3) Abera, A (2012) Factors Affecting Profitability: An Empirical Study on Ethiopian Banking Industry Unpublished Master’s Thesis Addis Ababa University Abreu, M & Mendes, V (2012) Commercial bank interest margins and profitability: evidence from E.U Countries, University of Porto Working paper Series 122 Ali, M (2011) A financial performance comparison of public vs private banks: The case of commercial banking sector of Pakistan International Journal of Business and Social Science, 2(11) Allred, A T., & Addams, H L (2013) Service quality at banks and credit unions: what their customers say? 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Return on assets 10 11 15 1280 01107 Capital adequacy 10 12 15 1336 01015 Asset quality 10 05 33 1675 10201 Liquidity 10 33 52 4289 05865 Operational Cost Efficiency 10 54 65 5888 03058 Income Diversification 10 85 89 8696 01239 GDP 10 30 6.90 4.1300 2.21813 Size 10 86 38 5182 52982 Inflation Rate 10 2.00 26.20 10.3100 6.69651 Valid N (listwise) 10 Source:(CBK, 2017) 57 Appendix III: Data Capture Template Bank Capital Asset Quality Adequacy Non-performing (Total loans/gross equity/total loans assets) Liquidity Bank Size Management (Log of Total Assets) (Current assets / Total deposits) Operational Cost Efficiency (Operating costs/net operating income) Income Diversification (Income from individual sources/total income) Barclays Bank 2008 2009 2010 2011 2012 2013 2014 2015 2016 CFC StanbicHoldin gsLtd 2008 2009 2010 2011 2012 2013 0.04 0.03 0.03 0.04 0.07 0.05 0.05 0.04 0.03 3.00 0.28 0.27 0.25 0.34 0.30 0.30 0.24 0.27 7.35 7.34 7.29 7.28 7.10 7.84 7.79 7.72 7.80 0.55 0.50 0.55 0.50 0.50 0.60 0.50 0.29 0.55 0.33 0.25 0.22 0.25 0.25 0.20 0.20 0.29 0.22 0.08 0.13 0.12 0.21 0.17 0.18 0.26 0.27 0.12 0.08 0.09 0.05 0.07 0.03 0.04 0.11 0.16 0.19 0.23 0.29 0.28 7.74 7.83 7.79 7.72 7.66 7.56 0.34 0.44 0.23 0.41 0.47 0.50 0.21 0.24 0.21 0.23 0.34 0.33 0.08 0.05 0.06 0.12 0.13 0.16 58 2014 2015 2016 I&M Holdings 0.03 0.02 0.02 0.31 0.33 0.29 7.65 7.54 7.49 0.60 0.77 0.47 0.46 0.48 0.34 0.18 0.17 0.13 0.06 0.06 0.07 0.05 0.04 0.03 0.06 0.02 0.05 0.12 0.14 0.17 0.24 0.31 0.37 0.20 0.41 0.14 7.40 7.33 5.38 5.35 5.32 5.27 5.22 8.32 8.26 0.54 0.56 0.49 0.58 0.61 0.62 0.67 0.64 0.56 0.25 0.19 0.17 0.23 0.31 0.33 0.41 0.45 0.19 0.14 0.13 0.23 0.25 0.29 0.31 0.33 0.25 0.13 0.04 0.06 0.05 0.04 0.06 0.05 0.07 0.03 0.05 0.16 0.14 0.21 0.22 0.26 0.24 0.12 0.23 0.26 8.26 8.16 8.18 8.06 7.90 7.85 7.73 7.60 8.33 0.41 0.52 0.50 0.56 0.61 0.66 0.67 0.70 0.61 0.31 0.24 0.37 0.36 0.39 0.41 0.44 0.47 0.39 0.26 0.22 0.28 0.24 0.29 0.24 0.28 0.29 0.29 Ltd 2008 2009 2010 2011 2012 2013 2014 2015 2016 Diamond Trust Bank 2008 2009 2010 2011 2012 2013 2014 2015 2016 59 Housing Finance Co 2008 2009 2010 2011 2012 2013 2014 2015 2016 Kenya 0.04 0.06 0.07 0.05 0.04 0.04 0.08 0.02 0.03 0.18 0.20 0.21 0.26 0.34 0.37 0.33 0.37 0.34 8.30 8.16 8.07 7.98 7.15 7.18 7.22 7.26 7.19 0.20 0.28 0.25 0.38 0.41 0.49 0.51 0.55 0.41 0.18 0.17 0.24 0.36 0.40 0.56 0.50 0.48 0.40 0.11 0.16 0.28 0.24 0.29 0.33 0.34 0.41 0.29 0.07 0.04 0.06 0.05 0.03 0.05 0.05 0.02 0.03 0.22 0.24 0.20 0.25 0.31 0.29 0.16 0.31 0.29 9.40 9.37 9.32 9.24 9.21 7.19 7.18 7.05 7.00 0.44 0.56 0.47 0.47 0.65 0.67 0.71 0.86 0.67 0.13 0.18 0.22 0.28 0.34 0.33 0.46 0.44 0.33 0.15 0.14 0.13 0.18 0.21 0.29 0.31 0.32 0.29 Commercial 2008 Bank Ltd 2009 2010 2011 2012 2013 2014 2015 2016 60 National Bank of Kenya 2008 Kenya 2009 2010 2011 2012 2013 2014 2015 2016 NIC Bank Ltd 2008 2009 2010 2011 2012 2013 2014 2015 2016 0.08 0.06 0.04 0.03 0.02 0.02 0.06 0.03 0.02 0.26 0.24 0.27 0.29 0.31 0.37 0.26 0.32 0.31 6.73 7.23 7.23 7.19 7.13 7.06 8.43 8.33 8.22 0.36 0.34 0.36 0.37 0.39 0.54 0.64 0.77 0.39 0.24 0.26 0.24 0.36 0.40 0.56 0.50 0.55 0.40 0.14 0.16 0.15 0.18 0.22 0.24 0.24 0.33 0.22 0.06 0.08 0.07 0.05 0.06 0.03 0.06 0.04 0.05 0.15 0.23 0.22 0.24 0.35 0.39 0.15 0.39 0.24 5.53 5.46 5.36 5.30 5.23 6.99 6.95 6.86 6.81 0.54 0.55 0.57 0.62 0.64 0.67 0.64 0.71 0.62 0.16 0.18 0.14 0.18 0.21 0.24 0.36 0.38 0.18 0.00 0.16 0.17 0.14 0.19 0.19 0.24 0.26 0.14 61 Standard Chartered 2008 Bank Ltd 2009 2010 2011 2012 2013 2014 2015 2016 Equity Bank 0.08 0.09 0.07 0.06 0.03 0.02 0.06 0.03 0.04 0.16 0.24 0.32 0.34 0.33 0.38 0.29 0.37 0.33 8.13 8.03 7.72 7.66 7.57 7.50 7.46 7.16 7.22 0.58 0.61 0.64 0.63 0.67 0.69 0.74 0.70 0.67 0.18 0.09 0.11 0.36 0.37 0.41 0.44 0.45 0.37 0.18 0.17 0.24 0.19 0.25 0.27 0.29 0.31 0.25 0.02 0.03 0.04 0.04 0.03 0.03 0.04 0.02 0.04 0.34 0.13 0.02 0.18 0.26 0.30 0.41 0.44 0.30 7.19 7.15 7.11 8.63 8.54 8.44 8.39 8.29 7.91 0.64 0.47 0.57 0.55 0.64 0.76 0.84 0.86 0.76 0.01 0.02 0.05 0.08 0.10 0.01 0.20 0.29 0.01 0.11 0.13 0.15 0.16 0.18 0.22 0.24 0.31 0.22 Ltd 2008 2009 2010 2011 2012 2013 2014 2015 2016 62 Co-operative Bank 2008 Bank ofKenya 2009 2010 Ltd 2011 2012 2013 2014 2015 2016 0.06 0.04 0.05 0.04 0.01 0.03 0.04 0.03 0.03 0.36 0.13 0.02 0.18 0.14 0.36 0.21 0.29 0.14 7.79 7.64 7.49 7.42 6.61 6.50 6.23 6.13 9.01 63 0.54 0.61 0.54 0.55 0.66 0.65 0.79 0.84 0.66 0.11 0.00 0.00 0.08 0.08 0.07 0.15 0.04 0.08 0.00 0.00 0.16 0.18 0.05 0.22 0.00 0.24 0.05 ... specific factors in order to enhance the quality of bank services in Kenya 1.5 Scope and delimitation of the study This study on the factors influencing the profitability of listed commercial banks profitability. .. is therefore essential to carry out the study on specific factors that influence profitability of listed commercial banks The project sought to research into the main factors influencing profitability. .. ii What are the factors that influence profitability of Kenya s listed commercial banks? iii What is the relationship between bank size and profitability of Kenya s listed commercial banks? iv