Determinants of Bank's Profitability in Kenya

A Project Report Submitted to the Chandaria School of Business in Partial Fulfillment of the Requirement for the Degree of Masters in Business Administration (MBA)The purpose of this study was to establish the determinants of banks profitability in Kenya. The study sought to answer three questions namely: What is the effect of bank specific factors on the banks profitability in Kenya? What is the effect of the industry specific factors on banks profitability in Kenya and what is the effect of macroeconomic factors on banks profitability in Kenya. The study used descriptive research design to investigate the determinants of various variables on bank profitability. A descriptive research is appropriate for this research due to its advantage of explaining the behavior of each bank and determining the relationship between the dependent and independent variables. A descriptive research design is used in structuring research showing all major component of project, which entails sample or groups, measures, treatments or programs and the different methods that work in unity to address the research phenomenon. The population under study was the 10 commercial banks listed under the Nairobi Securities Exchange as at December 2014. In this study the entire population of the 10 listed banks at the Nairobi securities exchange are the sample size. The study used secondary data collected from the audited financial statements of the banks obtained from their websites from the year 2010 to 2014. The collected data was analyzed using descriptive and inferential statistics to test the significance and direction of relationships between the study variables. Regression analysis was used to show the strength, direction and significance of the relationships which was consistent with the study which sought to detail the effect of the determinants of bank's profitability in Kenya and to determine the relationship between independent and dependent variables. In this study, regression and analysis of variance (ANOVA) models was obtained from the statistical package for social science (SPSS) and Microsoft excel. Presentation of the results was done in the form of tables and figures. Regression analysis results found a positive relationship between bank specific factors and the bank profitability measures namely: return on assets and return on equity with the correlation being statistically non-significant. The coefficients from the regression model found a positive effect of bank size and the liquidity ratio and an inverse relationship with capital adequacy with the bank profitability. With the industry specific factors, both market concentration and ownership showed a positive relationship with bank profitability with foreign banks being more profitable than the local banks. Banks with govemment participation were less profitable as compared to banks which does not transact with the government. The study found a relationship between the macroeconomic variables and bank performance with statistically significant correlation. Gross domestic product had a positive effect to bank profitability whereas inflation and interest rates had a negative effect. The study concluded that there exists a positive relationship between bank profitability and bank specific factors namely bank size, liquidity and capital adequacy. The study concluded that there exists a very strong positive non-significant relationship between market concentration and the bank's profitability. The study concluded that there exists a positive relationship and statistically significant correlation between bank profitability and the three macroeconomic factors namely: inflation, annual average inflation and gross domestic product (GDP) annual growth. The study recommends further research on factors affecting profitability for local non-listed banks in Kenya focusing on impact of the government and legal policies