International Journal of Management and Commerce Innovations ISSN 2348-7585 (Online) Vol. 7, Issue 2, pp: (164-171), Month: October 2019 - March 2020, Available at: www.researchpublish.com
MACRO-ECONOMIC FACTORS AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA SAMUEL OMBOKE NYABUTE 1, DANIEL MAKORI 2 1
MBA Student, Accounting and Finance Department, School of Business, Kenyatta University, P.O. Box 43844-00100, Nairobi, Kenya, Location: Nairobi. Email address: 2
Lecturer, Accounting and Finance Department, School of Business, Kenyatta University, P.O. Box 43844-00100, Nairobi, Kenya, Location: Nairobi
Abstract: The current study sought to assess the effect of macro-economic factors on financial performance of commercial banks in Kenya. The investigation explicitly assessed the implications of CBK rate, money supply, exchange rate and inflation on financial performance of commercial banks in Kenya. This research was based on Interest Rate Parity Theory, Quantity Theory of Money and Agency Theory. The examination adopted causal design of research. Research target population was Kenyan banks for the period of study (2012 to 2016) which are 40 in total. The research results showed that CBK Rate had an inverse considerable consequence on banks’ performance in Kenya. Secondly, it was found that money supply had a positive momentous consequence on banks’ performance in the context of Kenya. Thirdly, the outcomes from the regression analysis point to the fact that inflation had an inverse and immaterial influence on bank performance. Finally, the results of the investigation showed that exchange rate has a positive non-significant influence on banks’ perf0rmance. The recommendation from the examination was that Kenya’s Central Bank ought to be cautious in setting the base rate, it should be go lower rather than higher as this impacts negatively on bank performance. Also, the study recommended that the government of Kenya through the apex regulatory body should ensure adequate money supply in the country’s economy as higher supply results in better performance of banks. Keywords: Central Bank Rate, Money Supply, Inflation, Exchange rate Financial Performance, Commercial Banks.
1. INTRODUCTION 1.1 Background of the Study The role of economic resource allocation and risk distribution of expected capital in a country is majorly performed by the banking sector. Therefore, improved growth and wellbeing, and even business phases in an economy is ensured with an efficient and successful banking business (Macharia, 2013). There are several functions that are performed by banks thus making them more appropriate channels of monetary policy implementation. For instance commercial banks make available the services of payment processing and currency exchange; transforming assets on the basis of maturity, denomination , superiority and recently management and control of risks (Koki, 2013). Central Banks in developing countries encounter challenges in operating an effective monetary policy system. These challenges lie primarily on the fact that the financial markets in these countries are characterized by high government debts. A situation which is accompanied by complexities in estimating money-demand and fiscal-pressure to charge the tax inflation through raoid expansion of monetary base (MacCarthy, 2016). Generally, the monetary authorities in developing economies have poor records of administering monetary policy initiatives. This is largely as a result Central banks not being independent (that is separated from) of government. Over the years, there have been measures put in place to liberalize and reform the financial markets so as to provide a framework for monetary policy operation.
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