Since the introduction
of Structural
Adjustment
Programs (SAP) in the
late 1980’s, the
banking
sector worldwide has experienced major transformations in its operating environment. Countries have eased controls on interest rates, reduced government involvement and opened their
doors to international banks (Ismi, 2004). Due to this reform, firms of the developed nations have
become more visible in developing
countries through their subsidiaries and branches or by
acquisition of foreign firms. More specifically, foreign banks’ presence in other countries across the globe has been increasing tremendously.
Since 1980’s, many foreign banks have established their branches or
subsidiaries in different parts of the world. In the last two decades or so, the number of foreign banks
in
Africa in general and
Sub-Saharan
Africa in particular has been increasing significantly. On the contrary, the number of domestic banks declined (Claessens and Hore, 2012.) These have attracted the
interests of researchers to examine bank performance in relation to these reforms. There has been noticed a significant change in the financial configuration of countries in general and its effect on the profitability of commercial banks in particular. It is obvious that a sound and profitable banking
sector is able to withstand negative shocks and contribute to the stability of the financial system
(Athanasoglou et al. 2005.) Moreover, commercial banks play a significant role in the economic growth of countries. Through
their intermediation function
banks play a vital role in the efficient
allocation of resources of countries by mobilizing resources for productive
activities. They transfer
funds from those who don't have productive use of it to
those with productive venture. In
addition to
resource
allocation good bank performance rewards the shareholders with sufficient return for their investment. When there is return there shall be
an investment which, in turn, brings about economic
growth. On the other hand, poor banking performance has a negative repercussion on the economic growth and development. Poor performance can lead
to runs, failures and crises. Banking crisis could entail financial crisis which in turn brings the economic meltdown as happened in USA
in
2007 (Marshall, 2009.) That is why governments regulate the
banking sector through their central banks to
foster a sound and healthy banking system which avoid banking crisis and protect the depositors and
the
economy (Heffernan, 1996; Shekhar and Shekhar, 2007.) Thus, to avoid the crisis due attention was given to banking performance.
A more organized study of bank performance started in the late 1980’s (Olweny and Shipho,
2011) with
the application of Market
Power
(MP) and Efficiency
Structure (ES) theories
(Athanasoglou et al., 2005.) The MP theory states that increased external market forces results into profit.
Moreover, the
hypothesis suggest that
only
firms
with large market
share and well
differentiated portfolio (product) can win their competitors and earn monopolistic profit. On the
other hand,
the ES theory suggests
that enhanced managerial
and scale
efficiency
leads
to higher
concentration and then to higher profitability. According
to Nzongang
and
Atemnkeng in
Olweny
and Shipho (2011)
balanced portfolio theory also added additional dimension into the study of bank performance. It states that the portfolio composition of the
bank, its profit and the return to the
shareholders is the result of the decisions made
by the management and the overall policy decisions.
From the above theories, it is possible to conclude that bank performance is influenced by both
internal and external factors. According to Athanasoglou et al., (2005)
the internal factors include
bank size, capital, management efficiency and risk management capacity. The same
scholars contend that the major external factors that influence
bank
performance are macroeconomic variables such as
interest rate, inflation, economic growth and other factors like ownership.
