The Factors Influencing the Profitability of Kenyan Banks in the 21ST Century

A Project Report Submitted to Chandaria School of Business in Partial Fulfillment of the Requirement for the Degree of Global Executive Master of Business Administration (GeMBA)The study sought to assess the factors that affected profitability of banks in Kenya in the 21st Century. The main focus was on the recent developments and changes in the financial sector that have impacted banks and expected to impact banks further. The purpose of the study was to assess the factors that determine profitability of banks in Kenyan Industry in the 21st Century. The specific objectives guiding the study were; What are the effects of regulations on bank profitability? What are the effects of technology on bank profitability? What are the effects of macroeconomics on bank profitability? The research methodology used was quantitative explanatory research and the sampling design was stratified random sampling. The sample for the study involved 10 banks with the participants being 59 employees working in the finance department of the sampled banks. Questionnaires were the chosen tool used to collect data that was later analyzed using Microsoft excel. The study concluded that regulations are key to the operations of banks and hence profitability for banks. Regulations were found to lead to strategy changes and the reorganization of a banks’ balance sheet lines to meet the required ratios or regulations. The study found that core capital regulations led to banks adjusting their focus to lines with most impact on core capital rations. The bank mostly adjusted their loan book, fixed assets and other investments to meet the regulations. The impact of new corporate governance regulations have focused on the management structures and operation policies. The credit quality regulation were found to be critical in the enhancement of loan book quality and also shielding the bank against losses. The study found out that the new regulations have increased efficiency of operations, speed of decision making and increased the influence of the board of directors. The study established that technology was key and the impact of technological innovations are critical to operations of banks and their profitability. Technology was found to reduce the costs of transactions and also improve the access to solutions by the various customers. The study looked at internet and mobile banking at depth and established that the impact v on transactions and access to customer was greatly improved. The study found that technology had been accepted as a game changer in the new banking and it greatly reduced operational costs and thus profitability of banks. The study found out that macroeconomic factors affected operations and profits. Macroeconomic factors are external determinants of profitability of banks and impact both the bank and the bank’s customer. The study looked at GDP and Inflation and established that they affected business level in the economy and product prices, the business level changes meant more business for banks while the product price changes affected the operational costs. The impact of these factors was found to be on both income and expense lines of a bank hence a direct impact on profitability. The study concluded that all the factors were integral to profitability of banks and recommended that the understanding and factoring the key factors stated above in the strategy formulations and forecasting was needed to enhance and stabilize profitability of banks. The conclusion on the impact of regulations is that they are inevitable and banks should always opt for changes which are of minimal cost, that are easy to implement and also meet required minimum condition. The study concluded that corporate governance regulations led to a better managed institutions and smoothened operations. The credit quality regulations were found to improve stability of a bank. The conclusion of the study on technology was that it was next frontier in the provision of banking services and the pioneering banks in the field would benefit form a vast clientele and provision of affordable services. The study recommends that banks incorporate the impact of regulations, macroeconomic factors and technology in their strategic plans. This factors generally tend to shift the course of banks in disruptive way by reducing performance and or change the mode of operations. The recommends that banks should invest in understanding the factors and forecasting the expected changes hence ensuring they are to withstand any changes. The impact of the factors is minimized with proper planning and implementation of key mitigants like price adjustments and capital investments in line with the predicted changes