The Analysis of Profitability of Kenya`s Top Six Commercial Banks: Internal Factor Analysis

Abstract

The financial sector plays an important role in the development of the country. For sustainable economic growth, a country must have a strong banking sector. The Kenyan banking sector has experienced several challenges over time. The government has implemented several reforms to enhance growth and competition in this sector. To achieve financial stability and growth, it is important to identify the determinants of performance of the financial sector. This paper aimed at investigating the impact of the internal determinants of profitability of Kenyas top six commercial banks over the period 2008-2013, This paper used generalized least squares method to estimate the impact of bank assets, capital, loans, deposits and assets quality on banks profitability. This paper used return on assets (ROA) as a measure of profitability. The findings revealed that bank size, capital strength, ownership, operations expenses, diversification do significantly influence profitability of the top six commercial banks. The result suggests that the Kenyan Government should set policies that encourage commercial banks to raise their assets and capital base as this will enhance the performance of the sector. Another implication of the study is that commercial banks need to invest in technologies and management skills which minimize costs of operations as this will impact positively on their growth and survival.

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