ABSTRACT

Financial performance is paramount in any given economy. The performance of banks in Kenya is very crucial given the importance of banks in an economy. The financial performance of commercial banks is affected by various macroeconomic factors which this study delved into. This study aimed at contributing to research in determining to what extent macroeconomic factors influence financial performance banks in Kenya. The specific objectives of this study were: to ascertain the effect inflation, exchange rate and interest rate on financial performance of commercial banks listed on the Nairobi Securities Exchange, Kenya. Also, to ascertain the moderating role of bank size on the relationship between macroeconomic factors and financial performance of commercial banks listed on the Nairobi Securities Exchange, Kenya. The financial performance measure of commercial banks used was the Return on Equity (ROE) which was regressed against the macroeconomic factors including interest rate, exchange rate and inflation. The study is anchored on three theories namely: deflation theory, interest rate parity theory and agency theory. The study adopted a descriptive research design. A census of eleven listed commercial banks in Kenya that were in operation from 2012 to 2017, was carried out to gather information on the financial performance in the sector pertaining to the ROE. Secondary data was used and sourced from the audited financial statements of the listed commercial banks, KNBS and CBK. Data for the study was analyzed by use of panel regression model and presented using tables. Prior to carrying out the regression diagnostic tests were carried out for stationarity, correlation, normality and the Hausman test. The study concluded that the effect of inflation on financial performance is statistically insignificant. However, with regards to the effect of interest rate on financial performance of commercial banks, the study concluded that interest rate positively and significantly affects the financial performance of commercial banks listed on the NSE, Kenya. The study also concluded that there exist an inverse and significant effect of exchange rate on financial performance of commercial banks listed on the NSE, Kenya. Lastly, on the moderating effect the bank size on the relationship between macroeconomic factors and financial performance of commercial Banks listed at the NSE, Kenya. The study concluded that bank size has an insignificant moderating effect on the relationship between inflation and financial performance of commercial banks listed on the NSE, Kenya. Conversely, the study concluded that bank size has a positive and significant moderating effect on the relationship between interest rate and financial performance of commercial banks listed on the NSE, Kenya. Also, the study concluded that bank size has a negative and significant moderating effect on the relationship between exchange rate and financial performance of commercial banks listed on the NSE, Kenya. The study recommends that CBK should manage interest rates adequately in order to avoid its fluctuations as this will hamper performance of banks. Since the study concluded that the effect of exchange rate on financial performance is negative but statistically significant, the study recommends that bank management consider the prevailing and anticipated exchange rates in the economy when making decisions. The study suggests that further studies focus on all commercial banks in Kenya. Similarly, further research can be done on the moderating effect of capital adequacy requirements on the relationship between macroeconomic factors and financial performance of commercial banks in Kenya.