Effect of Financial Sector Policies on Commercial Bank Performance in Kenya

Abstract

Commercial banks and Regulatory Authorities have continued implementing various financial policies to enhance their solvency and performance. However, commercial banks have not identified all the policies influencing financial performance and to which extent they influence financial performance of commercial banks in Kenya. The purpose of the study was to investigate the effect of Financial Sector Policies on Performance of commercial banks in Kenya. The specific objectives of the study was;to examine how interest rate management policy affects performance of commercial banks in Kenya, to examine how Capital adequacy management policy affects the performance of commercial banks in Kenya, to investigate how liquidity management policy affects performance of commercial banks in Kenya, to establish how Credit risk management policy affects performance of commercial bank and to examine how Deposit Insurance management Policy affects the performance of commercial banks in Kenya. The study is anchored on liquidity preference, neoclassical and market power theories. Both primary and secondary data were used in the study. The research philosophy that was adopted for this research is that pursued by positivists and descriptive survey research design was applied. The population for secondary data were the 44 commercial banks in Kenya of which one was under statutory management. Panel data for 43 commercial banks that had data for 8-year period from 2010 to 2017 were obtained from the central bank of Kenya and banks website. For primary data, the target population was 172 respondents comprising Finance managers, risk managers, treasury managers and credit managers all were used in the study. Self-administered questionnaire was used. Descriptive statistics, correlation analysis, and random and fixed effects were used for secondary data using E-views software, while for primary data descriptive analysis and inferential where factor analysis, correlation and regression were used. The study rejects the null hypotheses that financial sector policies have no effect on financial performance of commercial banks in Kenya and finds out that liquidity, credit risk and interest rate have a positive effect on financial performance. It further indicates that deposit insurance and capital adequacy creates a financial performance lag on various commercial banks. The findings also revealed that Liquidity management policies which comprised of asset liability ratio and cash reserve ratio had the highest significance on performance of commercial banks in Kenya, therefore any commercial bank should have an effective liquidity management policy which unequivocally correlates with better bank performance. From the findings of the study, it was revealed that those commercial banks, which adhere to optimum liquidity ratio, maintained optimum cash ratio, maintained adequate risk based capital and lower levels of nonperforming loans recorded higher performance. The study therefore recommendation review of interest rate capping, and collaborations by commercial banks in liquidity management as a way of accelerating the penetration of liquidity and eventually avoiding liquidity crunch in the system.