2.2.2 External Factors/ Macroeconomic Factors
The macroeconomic policy stability, Gross Domestic Product, Inflation, Interest Rate and
Political instability are also other macroeconomic variables that affect the performances of banks. For
instance, the
trend of GDP affects the demand for banks asset. During the declining GDP growth the demand for credit falls which in turn negatively affect the
profitability of banks. On the contrary, in a growing economy as expressed by positive GDP growth, the demand for credit is high due to the nature of business cycle. During boom the demand for credit is high compared to
recession
(Athanasoglou et al., 2005). The same authors state in relation to
the
Greek situation
that the
relationship between inflation level and banks profitability is remained
to be debatable. The direction
of
the relationship is not clear (Vong and Chan, 2009).
2.3 Ownership Identity and Financial Performance
The study of the relationship between ownership and performance is one of the key issues in
corporate governance which has been the subject of ongoing debate in the corporate finance literature.
The relationship between firm
performance and ownership identity, if any, emanate from Agency Theory. This theory deals with owners and manager’s relationship, which one way or the other refers
to
ownership and performance. In relation to performance according to Javid and Iqbal (2008), the
identity of ownership matters more than the concentration of ownership. This is so because ownership
identity shows the behavior and interests of the owners. Ongore (2011)
argues that the risk-taking
behavior and investment orientation of shareholders have great influence on the decisions of managers in the day-to-day affairs of firms. According to Ongore (2011), the concept of ownership can be defined along two lines of thought: ownership concentration and
ownership mix. The concentration refers to proportion of shares held (largest shareholding) in the firm by few shareholders and the later
defines the identity of the shareholders. Morck et al. in Wen (2010) explained that ownership
concentration has two possible
consequences.
The
dominant shareholders have the power and incentive to closely monitor
the performances
of the management. This
in turn has two further consequences in relation to firm performance. On the one hand close monitoring of the management can reduce agency cost and enhance firm performance. On the other hand concentrated ownership can
create a problem in relation to overlooking the right of the minority and also affect the innovativeness
of
the management (Ongore, 2011; Wen, 2010).
Concerning
the relationship
between ownership identity & bank
performance
different
scholars came up with varying results. For instance according
to Claessens et al., (1998) domestic
banks' performance is superior compared
to their foreign counterparts in developed countries. According to the same scholars the opposite is true in developing countries. Micco et al. in Wen
(2010) also support the above argument in that in developing countries the
performances of foreign banks is better compared with
the
other types of ownership in developing countries. However, Detragiache (2006) presented a different view about
the foreign bank performance in relation to
financial sector development, financial deepening, and credit creation in developing countries. He
found that the performances of foreign banks compared to their domestic owned banks are
inferior in
developing countries. Ownership is one of the variables that affect the
performance of banks.
Specifically, ownership identity is one of the factors explaining the performances of banks across the
board; yet the level & direction of its effect remained contentious. There are scholars who claimed that
foreign firms perform better with high profit margins and low costs compared to domestic owned
banks (Farazi et al., 2011). This is so because foreign owned firms are believed to have tested management expertise in other countries over years. Moreover, foreign banks often customize and
apply their
operation systems found
effective at
their
home countries (Ongore,
2011). It
is also assumed that banks crossing boundaries are often those big and successful ones.
For instance in
countries such as Thailand, Middle East and North Africa region,
it was
found that foreign banks
performance is better than domestic
counterparts (Azam and Siddiqui, 2012; Chantapong, 2005; Farazi
et
al. 2011). The
study conducted in Pakistan by Azam and Siddiqui (2012) concluded that "...foreign
banks are more
profitable than all domestic banks regardless of their ownership structure
by applying regression analysis." They further suggest that "...it is better for a multinational bank to establish a subsidiary/branch rather than acquiring
an “existing
player” in
the
host country."
Moreover,
Chantapong (2005) by
studying domestic and
foreign bank
performance in
Thailand concluded
that foreign banks are more profitable than the average domestic
banks profitability. It is also supported by Okuda and Rungsomboon (2004) that foreign owned banks in Thailand are found to be efficient compared to
their domestic counterparts due to modernized
business activities supported by
technology, reduced
costs associated with fee-based
businesses and improved their operational efficiency. These indicate that
in the area
studied
above foreign banks were found to be more profitable
than their domestic counterparts. The major reason behind these assertions is that foreign banks were believed to be strong & efficient.
However, there are
scholars who argue that domestic
banks perform better then foreign banks.
For instance
(Cadet, 2008) stated that "... foreign banks are not always more efficient than domestic
banks
in developing countries, and even in
a
country
with low income level." Yildirim and
Philippatos in Chen and Lia (2009) also support the above view that foreign owned banks performed not better, even less than
the
domestic banks in relation to developing countries especially in
Latin
America. The study conducted in Turkey by Tufan et al. (2008) also found that domestic banks
perform better than their
foreign counterparts. There are also other
scholars who argue that the
performance of domestic and foreign
banks varies from region
to region. Claessens et al. (1998), for example, stated that foreign banks perform better in developing countries compared to when they are in developed countries. Thus, they conclude that domestic
banks perform better in developed countries than when they are in developing countries.
They further assert that an increase in the share of foreign banks leads to a lower profitability of domestic banks in developing countries. Thus, does ownership identity influence
the performance of commercial banks? Studies have shown that bank performance can be affected by internal and external factors (Athanasoglou et al. 2005; Al-Tamimi, 2010; Aburime,
2005.) Moreover, the magnitude of the effect can be influenced by the decision of the management.
The management decision, in turn, is affected
by the interests of the owners which is determined by their investment preferences and risk appetite
(Ongore, 2011). This implies the moderating role of
ownership
identity. This
study attempted to
examine
whether
ownership
identity significantly moderate the relationship between commercial banks' financial performance and its determinants in
Kenya or not.
2.4. Conceptual Framework
The conceptual framework is developed from the review of literature discussed above and
presented in the
following diagram (figure 1).
It shows the
relationship between the dependent (ROA,
ROE, NIM) and explanatory (bank
specific and macroeconomic) variables. It also demonstrates the
moderating role of ownership identity.
