Organization Characteristics, Efficiency, Financial Regulation and Performance of Commercial Banks in Kenya

Abstract

Purpose: The purpose of the study was to establish the relationship between organization characteristics, efficiency, financial regulation and financial performance of commercial banks in Kenya.

Methodology: The study used unbalanced panel data sourced from the Central Bank of Kenya for the period 2011 to 2021 across the 43 commercial banks. Organization characteristic was measured using weighted composite index of total assets, liquidity risk, asset quality, management quality, non-traditional activities and technological innovation; efficiency was captured using data envelopment analysis; financial regulation was measured using the composite index of capital adequacy and deposit/loan ratio; while financial performance was measured using a weighted composite index derived from return on assets and net interest margin. The relationship was assessed using panel least squares regression.

Findings: The study found that there was statistically significant relationship between organization characteristics and financial performance of commercial banks in Kenya (β = .571, p = .014).  The relationship between efficiency and financial performance was not statistically significant (β = -.026, p = .115). The relationship between financial regulation and financial performance was not statistically significant (β = -.013, p = .715). The overall model was statistically significant (β = .056, p = .000, R2 = .802). The results organization characteristic, efficiency and financial regulation together predict the financial performance of commercial banks in Kenya.

Implication: The results imply organization characteristic are some of the most critical determinants of financial performance of commercial banks and the banks should strive to have a mix of internal characteristics that will enhance their financial performance. The banks understand that efficiency and financial regulation influence their levels of performance.

Value: The study adds value to policy makers, banking regulators and managers in understanding the influence of organization characteristics of banks, efficiency and financial regulation on the financial performance of the banks. The banking regulations should encourage banks to attain internal characteristics that enhance their profitability; move banks to attain levels of efficiency that enhance their financial performance; and develop financial regulations that will not lower the profitability of commercial banks.

Keywords: Organization Characteristics, Efficiency, Financial Regulation, Financial Performance, Commercial Banks.