Commercial banks play a vital role in the economic resource allocation of countries. They
channel funds from depositors to investors continuously. They
can
do so, if they generate necessary income to cover their operational cost they incur in
the
due course. In other words for sustainable intermediation function, banks need to be profitable. Beyond the intermediation function, the financial
performance of banks has critical implications for economic growth of countries. Good financial
performance
rewards the shareholders for their investment. This, in turn, encourages additional investment and brings about economic growth. On the other hand, poor banking performance can lead to banking failure and crisis which have negative repercussions on the economic growth.
Thus, financial performance analysis of commercial banks has been
of
great
interest
to academic research since
the Great Depression Intern the
1940’s. In the last two decades studies have shown that commercial banks in Sub-Saharan Africa (SSA) are more
profitable
than the rest of the world with an average Return on Assets (ROA) of 2 percent (Flamini et al., 2009). One of the major reasons behind high return in the region was investment in risky ventures. The other possible reason
for the high profitability in commercial banking business in SSA is the existence of huge gap between
the
demand for bank service
and
the supply thereof.
That means, in SSA the number of banks are few
compared to the demand for the
services; as a result there is less competition and banks charge high
interest rates. This is especially true in East Africa where the
few government owned banks take the lion's share of the market. The performance of commercial banks can be affected by internal and
external factors (Al-Tamimi, 2010; Aburime, 2005).
These
factors can be classified into bank specific (internal) and macroeconomic variables. The internal factors are individual bank characteristics which
affect the bank's performance. These factors are basically influenced by the internal decisions of management and board. The external factors are sector wide or country wide factors which are beyond the control of the company and affect the profitability of banks.
Studies show that performance of firms can also be influenced by ownership identity (Ongore,
2011). To study the effect of ownership identity, we introduced the concept of moderating variable. In this
study the ownership identity is classified into foreign and domestic. The domestic vis-à-vis
foreign classification
is based on the nature of the existing
major ownership identity in Kenya. According to Central Bank of Kenya (2011) Supervision Report as of December 2011 out of the 43
commercial banks 30 of them are domestically owned and 13 are
foreign owned. In terms of asset holding,
foreign banks account for about
35%
of the banking assets as
of 2011.
In Kenya the commercial banks dominate the financial sector. In a country where the financial sector is dominated
by commercial banks, any failure in the
sector has an immense implication on the economic growth of the country. This is due to the fact that any bankruptcy that could happen in the sector has a contagion effect that can lead
to bank runs, crises and bring overall financial crisis and economic tribulations.
Despite the good
overall financial performance of banks in Kenya, there are a couple of banks declaring losses (Oloo, 2011). Moreover, the current banking failures in the developed countries and the bailouts thereof motivated this study to evaluate the financial performance of banks in Kenya.
Thus, to take
precautionary and mitigating measures, there is dire need to understand the performance
of
banks and its determinants.
This study
utilized
CAMEL approach
to check
up the financial health
of
commercial banks, Intern line with
the recommendations of the Basel Committee on Banking
Supervision of the Bank of International Settlements (BIS) of 1988 (ADB in Baral, 2005).
Most studies conducted in relation to bank performances focused on sector-specific factors
that affect the overall
banking sector performances (Chantapong, 2005; Olweny and
Shipho, 2011 and Heng et al., 2011). Nevertheless, there
is
a need to include
the
macroeconomic variables.
Thus, this
study has incorporated key macroeconomic variables (Inflation and GDP) in the analysis. Moreover, this study examined whether ownership identity has influenced the
relationship between bank performance and its determinants.
