Macroeconomic Variables and Financial Performance of Commercial Banks in Kenya.

Abstract

The global economic environment continues to experience fluctuating inflation rate rates, varying levels of Gross Domestic Product (GDP) growth, and ever-rising levels of unemployment. These macroeconomic changes affect profitability of commercial banks across different regions worldwide. The rationale of this study was to determine the effect of macroeconomic factors and financial performance of the commercial banks in Kenya. Specifically, the study sought to investigate the effect of interest rate, GDP growth, unemployment, and inflation rate on financial performance of commercial banks in Kenya. In addition, the research work sought to determine the moderating effect of bank size on the relationship between macroeconomic factors and financial performance. The economic theory and inflation rate uncertainty theory provided the theoretical foundation of the study. A causal research design based on panel data approach was adopted in the study. The study used secondary data which was obtained from 37 commercial banks for the period covering 2013 through 2022. Data was sourced from The Kenya National Bureau of Statistics, the Central Bank of Kenya, and audited financial statements of the commercial banks considered in this study. Data analysis involved both descriptive and inferential statistics where the former constituted of the mean and standard deviation while the latter comprised of panel regression. Normality, multicollinearity, heteroskedasticity, stationarity, and model specification tests were the main diagnostic tests utilized in the study while presentation of the data was done using tables and graphs. The hypotheses were tested at a level of significance of 5%. The findings revealed that interest rate had a positive and statistically significant effect on financial performance (r=.002; p=.007; p< .05), GDP exhibited a positive and statistically significant effect on ROA (r=.147; p=.048; p<.05) whereas unemployment showed a negative and statistically significant effect on ROA (r=-.004; p=.002; p<.05). Moreover, inflation rate revealed a negative and statistically significant effect on return on assets (r=-.111; p=.021; p<0.05). Bank size positively moderated the relationship between GDP growth and financial performance (p=.043; p<.05) whereas it exhibited an insignificant moderating effect on the relationship among Interest rate, unemployment, and inflation rate, as predictor variables, and financial performance (p>0.05). The study recommends that commercial banks should leverage on interest rate increases to boost profitability through strategic adjustment of loan and deposit rates to maximize interest income.