FACTORS AFFECTING THE PERFORMANCE OF COMMERCIAL

BANKS IN ELDORET TOWN OF UASIN GISHU COUNTY, KENYA

Christopher Oyembo

OCTOBER, 2019
 Abstract
The factors that affect performance of commercial banks are considered many. Commercial
banks continue to be shut down with others being placed under receivership management.
Research has conflicting findings on the influence of these factors. This has made it difficult
for practices based on empirical facts. This study proposes to determine the factors that affect
performance of commercial banks in Kenya. This study used three specific objectives: to find
out the effects of interest rates capping on the performance of commercial banks in Eldoret
town of Uasin Gishu County, in Kenya; to determine how the capital adequacy have affected
the performance of commercial banks in Eldoret town of Uasin Gishu County, in Kenya and
to determine the effects of cost of operations on the performance of commercial banks in
Eldoret town of Uasin Gishu County, in Kenya. The mixed research design was utilized in the
study. The study targeted all employees of 14 commercial banks in Eldoret Town. The
secondary data was capturing the performance of the commercial banks over the period 2015-
2019 and was obtained from published financial statements, CBK publications and journals,
World Bank Journals and relevant Government Ministries. The data obtained from the study
environment was analyzed through descriptive statistics and inferential statistics by use of
SPSS version 25. The findings of the study showed that performance of commercial banks is
unstable with the investigated factors including capping of interest rates, capital adequacy and
cost of operations having effects on performance of these banks.

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 Table of Contents
Abstract.......................................................................................................................................ii
Table of Contents.......................................................................................................................iii
List of Tables............................................................................................................................viii
CHAPTER ONE........................................................................................................................1
1.0 INTRODUCTION...............................................................................................................1
1.1 Background to the Study.......................................................................................................1
1.2 Statement of the Problem......................................................................................................8
1.3 Objectives of the Study.........................................................................................................9
1.4 Research Questions...............................................................................................................9
1.5 Justification of the Study.......................................................................................................9
1.6 Significance of the Study....................................................................................................10
1.7 Scope of the Study...............................................................................................................11
CHAPTER TWO.....................................................................................................................12
2.0 LITERATURE REVIEW.................................................................................................12
2.1 Introduction.........................................................................................................................12
2.1.1 The Effects of Interest Rates Capping on the Performance of Commercial Banks.........14
2.1.2 The Effects of Capital Adequacy on Performance of Commercial Banks.......................16
2.1.3 Effect of Asset Costs of Operations on the Performance of Commercial Banks.............19
2.2 Theoretical Review.............................................................................................................19
2.2.1 Efficiency Theory.............................................................................................................20
2.2.2 Buffer Theory of Capital Adequacy.................................................................................20
2.2.3 Expense Preference Theory..............................................................................................22
2.3 Empirical Review................................................................................................................22
2.4 Conceptual Framework.......................................................................................................30
2.5 Critical Review of Literature...............................................................................................31
2.6 Knowledge Gaps.................................................................................................................34
2.7 Summary of Literature........................................................................................................35
CHAPTER THREE................................................................................................................36
3.0 RESEARCH METHODOLOGY.....................................................................................36
3.1 Introduction.........................................................................................................................36
3.2 Research Design..................................................................................................................36
3.3 Target Population and Sample Frame..................................................................................38
3.4 Samples and Sampling Procedure.......................................................................................39
3.5 Instrumentation....................................................................................................................42
3.6 Data Collection....................................................................................................................44
3.7 Data Analysis Technique.....................................................................................................45
CHAPTER FOUR...................................................................................................................46
DATA ANALYSIS, PRESENTATION AND INTERPRETATION....................................46
4.0 Introduction.........................................................................................................................46
4.1 Response Rate.....................................................................................................................46
4.2 Demographic Characteristics..............................................................................................47
4.2.1 Gender of Respondents....................................................................................................47
4.2.2 Respondents Age Bracket.................................................................................................48
4.2.3 Respondents Level of Education......................................................................................49
4.2.4 Respondents Position Held...............................................................................................49

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4.2.5 Respondents Duration in the Current Post Held..............................................................50
4.3 Commercial Banks Performance.........................................................................................51
4.3.1 Products Review Frequency.............................................................................................51
4.3.2 Commercial Bank Performance.......................................................................................53
4.4 Factors Affecting Performance of Commercial Banks.......................................................61
4.4.1 Affordability of Interest rates Before Capping.................................................................61
4.4.2 Interest Rates Affordability to Customers after Capping.................................................62
4.4.3 Increased Number of Loan Requests after Interest Rates Capping..................................63
4.4.4 Commercial Banks Increased Lending After Interest Rates Capping..............................64
4.4.5 Commercial Bank Revenue Increase after Interest Rates Capping..................................65
4.4.6 Commercial Bank Considering their Markets..................................................................66
4.4.7 Effect of Capping of Interest Rate on Credit Borrowing.................................................67
4.4.8 Effect of Interest Rate Capping on Bank Profitability.....................................................70
4.4.8 Effect of Interest Rate Capping on Portfolio of Non-Performing Loans.........................72
4.4.9 Applicability of Basel II Accord in the Kenyan Commercial Banks...............................75
4.4.10 Capital Adequacy Requirement Compliance by Commercial Banks.............................76
4.4.11 Effect of Interest Rate Capping on Portfolio of Non-Performing Loans.......................77
4.4.12 Capital Adequacy Factor and Commercial Bank Performance......................................78
4.4.13 Importance of Dimensions of Cost of Operations..........................................................81
4.4.13 Effects of Cost of Operations on Commercial Bank Performance................................82
CHAPTER FIVE.....................................................................................................................87
DISCUSSIONS OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS.........87
5.0 Introduction.........................................................................................................................87
5.1 Discussions of Findings......................................................................................................87
5.2 Conclusions.........................................................................................................................92
5.3 Recommendations...............................................................................................................95
5.4 Suggestion for Further Studies............................................................................................96
References.................................................................................................................................97

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 List of Figures
Figure 2.1: Conceptual Framework...........................................................................................31
Figure 4.1: Illustration of Respondents’ Gender Representation..............................................48
Figure 4.2: Interest Rates before Capping Affordable to Customers........................................62
Figure 4.3: Interest Rates Affordability to Customers after Capping....................................... 63
Figure 4.4: Increased Number of Loan Requests after Interest Rates Capping........................ 64
Figure 4.5: Applicability of Basel II Accord in the Kenyan Commercial Banks......................75
Figure 4.6: Distribution of Importance of Dimensions of Cost of Operations......................... 81

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 List of Tables
Table 3.1: Target Population of Selected banking Institutions..................................................37
Table 3.2: Sample Size and Sampling Procedure......................................................................42
Table 3.3: Stratified Sample Size Procedure.............................................................................42
Table 4.1 Response Rate of Respondents..................................................................................47
Table 4.2: Distribution of Respondents’ Age Bracket...............................................................48
Table 4.3: Distribution of Respondents’ Level of Education at the time of this study.............49
Table 4.4: Frequency Distribution of Respondents Position Held............................................50
Table 4.5: Frequency Distribution of Respondents’ Duration in the Post.................................50
Table 4.6: Importance of Commercial Bank Performance Dimensions....................................52
Table 4.7: Distribution of Respondents on Bank Performance.................................................53
Table 4.8: Respondent Opinion on Increased Lending After Interest rates Capping................65
Frequency Percentage............................................................................................................... 65
Table 4.9: Commercial Bank Revenue Increase after Interest Rates Capping..........................65
Table 4.10: Respondents on Commercial Bank Considering their Markets............................. 66
Table 4.11: Descriptive Statistics on Effect of Interest Rate Capping on Borrowing...............67
Table 4.12: Effect of Interest Rate Capping on Bank Profitability...........................................70
Table 4.13: Effect of Interest Rate Capping on Portfolio of Non-Performing Loans...............73
Table 4.14: Capital Adequacy Requirements…………………………………………………75
Table 4.15: Basel III Regulations Effects on Capital Requirement of Commercial Banks......77
Table 4.16: Capital Adequacy Factor and Commercial Bank Performance..............................78
Table 4.17: Effects of Cost of Operations on Commercial Bank Performance........................84

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 CHAPTER ONE

1.0 INTRODUCTION

This chapter provides the background of the study, the statement of the problem, the objectives

of the study, the research questions, the significance of the study, the scope and limitation of the

study and theoretical framework.

1.1 Background to the Study

Globally, achieving and maintaining desired commercial bank performance is recognized to be a

hard task most mangers face. Commercial Banks play a key role in the distribution and allocation

of economic resources of a Country. As intermediaries, these banks facilitate movement of

financial resources from depositors to borrowers and back; linking those with excess finances

and those with financial deficits (Mushtaq and Ahmed, 2016 and Ongore, 2013). This role

requires adequate revenue generation to earn profits. Although banks have faced financial

disintermediation and the growth in market-based finance, they continue to remain essential to

the performance and operation of modern economies (Dietrich and Wanzenried, 2010).

One of the most main parameters considered in evaluating the performance of banks is

profitability. In this case, banking industry continue to face closure of most banks due to poor

performance. This poor performance is a concern that affects global economies including

financial crisis. This means that the search for alternative means of improving commercial banks

performances is essential for their stability and sustainability. This drive has seen introduction of

various concepts including interest rate capping; use of financial adequacy and cost of operations

strategies. These are fundamental tools that are used to provide checks on commercial banks

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operations (Were, M., and Wambua, A., 2014). Although the banking sector is the backbone of

any country's economy; some outcomes have been harsh, such as financial crisis related to

commercial banks operations. The sizes of bank deposits are considered the main source of

revenue for commercial banks.

Commercial banks operate in money lending by being efficient in interest rate management.

Uncontrolled high interest rates on loans from commercial banks have been a frequent frustration

of policymakers in developing countries. These high rates are considered main barriers to greater

investment, financial inclusion, and economic growth. It means that high spreads between

deposit and lending rates, in the absence of effective competition, can also lead to above-normal

profits, which may be misleading that the economy is on the right track. According to Bakker,

A., Schaveling, J., & Nijhof, A. (2014) high interest rates charged is the main barrier for low

income earners have adequate or no access to conventional banking products.

Worldwide, governments introduce interest rates caps as a means towards achieving various

economic and monetary policy objectives. In Japan, interest rates caps were implemented under

the Capital Subscription Law at a maximum of 20% from 29.2%. This was aimed at influencing

Japanese SMEs to be brought in the mainstream banking system and access to credit facilities.

The directive ordered by the Supreme Court decision was initially opposed by commercial banks

arguing that this could lead to losses in the banking sector. Nevertheless, it was later reported by

the financial services agency that commercial banks recorded profits in excess of 1 billion yen

(Honda and Kuroki, 2006 and Central Bank of Kenya, 2016).

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In Malaysia during the financial crisis of 1996, the then finance minister pegged the exchange

rate between the United States of America Dollar (USD) and the Malaysian Ringgit (MYR), that

is (1 USD = MYR 3.5 Maximum). Also the bank interest rates were also pegged to a maximum of

11%, which was 4% higher than the interest free rate which was 7% then. This was a mechanism

to control further damage to the financial crisis as results of market forces, which are influenced

by market players (Djibril, M., 2013). At the time of their introduction, Kenya’s interest rate

controls affected more than half of all existing loans and deposits. As such, they were among the

most drastic ever imposed and provide a fascinating case study with lessons for many developing

countries. This law enabled Malaysian government to reduce financial market speculations that

would introduced more dollar and ringgit transactions that could create more harm to the already

damaged and ailing financial sector.

In African continent, most countries have also implemented interest rates ceilings with varying

levels of success and failure. However, these governments argued that interest rates ceiling

negation of interest rates ceilings was a result of high interest rates charged by banks and the

need to spur economic growth. Over 17 countries in Sub Saharan African countries had

introduced interest rates caps in one way or another (World Bank Reports cited by Dibril, M.,

2013). In the West Africa Economic and Monetary Union block, the interest rate ceilings

introduced in 1997 was reduced by 3% with a maximum of 15% for commercial banks and 24%

for Microfinance institutions. Other countries that implemented the same policy included Chad,

Congo, Equatorial Guinea and Gabon. In Sub Saharan Africa (SSA) (Were, M., and Wambua,

A., 2014) most countries still experience double digit interest rates despite structural adjustment

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reforms having been initiated and undertaken by them which led to interest rates liberalization in

the region among several countries.

In Zambia, the Bank of Zambia introduced interest rate caps. This was capped at 42% maximum

annual interest rates for non-Banking financial institutions while for microfinance institutions

could not exceed 30%. This was to put checks on banks that were believed to be charging

exorbitant interest rates on their roles citing high risks. The outcomes and impacts of these high

rates were large number of locked out customers, hence the need for government intervention.

However, this policy failed to work as anticipated in Zambia and was later repealed in the year

2015 (Nyakio, S., 2017). While this is happening, Islamic banking concept operates interest free

financial services while at the same time, in Japan the interest rate capping did not bar banks

from recording high level of profitability (Central Bank of Kenya, 2016).

In Kenya, the financial sector was liberalized in the early 1990s. This was a move to enable

interest rates to be determined by market forces. These market forces hardly worked for an

equitably a balanced financial market. In fact high rates of interest were experienced in Kenya.

According to Were, M., and Wambua, A. (2014) this persistent high rates of interest became a

major concern attracting debates in various forums including public and private ones. Kenya

among other African countries have for a long a period of time been grappling with the challenge

of high interest rates which stifles investment through credit and economic growth.

This situation continued in Kenya for the last decade where commercial; banks have been

charging high interest rates. According to Irungu, P. N. (2013), interest rate charged to borrowers

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has continued to be abnormally highs of up to thirty percent and above in 2012 while interest rate

earned by savers remained relatively low to 2.4% annually. The banking sector in Kenya

continued to register increasingly abnormal profitability while most sectors in the economy were

stagnating or declining. The high profitability in the sector was perceived to be increasing

against a backdrop of decreasing access to credit or credit uptake which was further stifling the

growth of Kenya’s economy. This situation resulted in increased debate by the public and

members of parliament to control bank interest rate charged by banks to borrowers. On the other

hand, banks argued that control of bank interest rates would ultimately lead to the collapse of the

banking industry. In September 2016, a law on interest rate controls, which imposed a ceiling for

lending rates at four percentage points above a “reference rate” and a floor on deposits at 70

percent of the “reference rate received unanimous support from Parliament. The reference rate

was subsequently clarified to be the Central Bank Policy Rate (CBR).

Other than interest rates caps banks also face the challenge of capital adequacy. The need to have

enough capital to ensure their businesses remain stable is also a factor of concern. This further

complicates matters to commercial banks since most banks with adequate capital lead in loss

making and poor performance in other aspects of performance measures (Central Bank of Kenya,

2018). Due to this outcome and impact, banks are not sure whether capital adequacy is an

automatic way of good performance. Yet there are inadequate practices towards using the capital

adequacy as a means of survival for banks. Although it is a statutory minimum capital reserve

that a financial institution or investment firm must have available and regulatory capital

adequacy provisions thus require relevant firms to maintain these minimum levels of capital,

calculated as a percentage of its risk weighted assets. Often Capital Adequacy is referred to as

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the required Regulatory Capital of a firm. It should represent the most critical element of banks

stability and solidarity. However, banks operational activities are indicative of diminishing

stability and solidarity.

In Kenya, most investors and stakeholders do not appear to understand what really determines

capital adequacy and why some banks perform better than others (Ongore, V., 2010). In an effort

to promote efficiency in the banking industry, to control weaknesses resulting from worldwide

liberalization and deregulation, the Basel Capital Accord of 1988 (Basel I) which led to the

endorsement of a new capital adequacy framework (Basel II) in 2004 marked the beginning of a

new phase of re-regulation with an attempt to bring about an international harmonization of

banking regulations (Priti, V., 2016). In assessing bank’s efficiency, the level, nature and

composition of capital and the cost income ratio are some of the key measures used to determine

performance of a bank (Kozak, S., 2016).

Capital is one of the bank factors that can influence the level of bank profitability. It forms the

amount of own fund available to support the bank's business and act as a buffer in case of

adverse situation (Onyiriuba, L., 2016). Banks capital creates liquidity for the bank due to the

fact that deposits are most fragile and prone to bank runs. Greater bank capital reduces the

chance of financial hardship. Adequacy of capital is judged on the basis of capital adequacy ratio

(CAR). CAR ratio shows the internal strength of the bank to withstand losses during crisis as

sited by Dang (2011).

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Capital adequacy regulation is often viewed as a buffer against insolvency crises, limiting the

costs of financial hardship by reducing the probability of insolvency of banks. Irrespective of the

viewpoint, a general consensus is that banks with higher capital and liquidity buffers are better

able to support businesses and households in bad times since buffers enhance the capacity of

banks to absorb losses and uphold lending during a downturn (Ristolainen, K., 2016).

Equally of fundamental to the commercial banks performance is the costs incurred during the

process of revenue generation. Banks develop accounts for deposits and create loans for

borrowers. These operations incur costs and commercial banks have realised that their own

operations may be holding them back. Most commercial banks are fully automating new deposit

account opening, loan application, wire transfer processing, direct from the retail banking system

to the wire processing system taking advantage of electronic forms and signature features now

available with most core and retail platforms. Yet even the automated commercial banks

experience high costs of operation with little understanding of their impacts on financial

performances. Also these banks are grappling with inevitable loss of scale and cost issues. It

implies that the desire to have more customers specifically carrying out their own banking

transactions without staff intervention; fewer points of contact between customers and staff

translates to lower costs approach and to make staff savings, which currently represent more than

half of a bank’s costs are yet to be fully accomplished.

While this is the situation, most commercial banks across the globe continue to experience lost

revenues. This is a critical dilemma that banks find themselves in. this means that the desire to

improve on the profitability and financial performance through downsizing as a means of cost

7
reduction is proving not enough to deliver the cost base reductions needed. It also informs the

commercial banks that a more effective approach of understanding the various factors that can

influence financial performance is fundamental yet lacking.

1.2 Statement of the Problem

Although available studies in Japan, Malaysia, and other parts of the world accepts that interest

rates capping does not hinder banking profitability, most African literature presents a failed state

of banks when interest rates caps was introduced. How these environments are possible yet most

banks in Africa complain and lobby strongly for the removal of these controls desire an

investigation to determine any influence of interest rates capping on their profitability.

Moreover, banks insure their compliance to the capital adequacy policy. This is a drive that most

banks do not want to underperform. However, the reasons for this drive are not clear yet all

banks in developing and developed face performance challenges. In particular banks make loses

globally. In addition to that, moves by banks to manage costs of operation are becoming a

common practice. In UK, USA, Asia Pacific and Australia banks are focusing on minimising

costs of operation including automating their services to deliver cost based reduction, the

continued poor financial performance is a worry that most banks fear to deal with. Likewise, the

traditional practices of staff downsizing as a means of cost reduction are not having any impacts

on the bottom-line results. It means there is a need for investigation to find out the influence of

capital adequacy, costs of operation and interest rates caps on financial performance of

commercial banks in Kenya.

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1.3 Objectives of the Study

The general objective was to investigate factors affecting performance of commercial banks in

Eldoret Town of Uasin Gishu County, in Kenya.

The specific objectives were:

i) To find out the effects of interest rates capping on the performance of commercial banks

in Eldoret Town of Uasin Gishu County, in Kenya

ii) To assess the effects Capital Adequacy on the performance of commercial banks in

Eldoret Town of Uasin Gishu County, in Kenya

iii) To determine how the Costs of Operations affects the performance of commercial banks

in Eldoret Town of Uasin Gishu County, in Kenya

1.4 Research Questions

i) What are the effects of interest rates capping on the performance of commercial banks in

Eldoret Town of Uasin Gishu County, in Kenya?

ii) In which ways do Capital Adequacy affects the performance of commercial banks in

Eldoret Town of Uasin Gishu County, in Kenya?

iii) What are the effects of Costs of Operations on the performance of commercial banks in

Eldoret Town of Uasin Gishu County, in Kenya

1.5 Justification of the Study

Commercial banks continue to struggle to balance their performance indicators with the

opportunities required to achieve panned objectives and goals. Most commercial banks in

9
banking industry including other institutions are unable to accurately and strategically make use

of their own resources to generate profits and sustain growth thereby making their survival

difficult. In fact most banks in the Kenyan economy are considering mergers and acquisition.

This trend has where been witnessed in Malaysia where 56 banks merged to form from 14 large

ones. This has made management difficult in controlling affordable credit access leading to

diminishing performances. Studies have recognised various factors as useful means of managing

performance yet commercial banks in Kenya continue to face varieties of challenges that put

pressure on returns. Moreover, individual group of business operations continue to face rising

failures to meet financial objectives. This has made such commercial bank to operate on large

non-performing loans, bad debts among others. Even cost reduction is a challenge difficult to

solve for business organisations. It is in this regards the researcher proposes Eldoret Town to

investigate factors affecting performance of commercial banks in Eldoret Town of Uasin Gishu

County, in Kenya.

1.6 Significance of the Study

This project study is significant for providing an improved understanding of the factors

influencing performance of commercial banks. General performance of a firm affects the interest

of its stakeholders. The stakeholders refer to trade creditors, bondholders, investors and

management and other user of financial statements. Trade creditors are interested in the liquidity

of the firm, bondholders are interested in the cash flow ability of the firm, investors are interested

in present and expected future earnings as well as stability of these earnings and management is

interested in internal control, better financial condition and better performance of firm.

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Commercial banks are one of the major core components of modern economy. On the other

hand, bank and financial institutions are in tight competition with one another within the

industries as well. At this situation, the commercial banks should be more competitive. They

should become financially healthy and must have growth potentiality. In addition, they have to

shape their plans and strategies accordingly.

Therefore, the conclusions drawn from this study are beneficial and valuable for commercial

banks in formulating the right operational policies that enable them to generate sustainable

profitability, which is essential for them to maintain ongoing activity. The conclusions are also

crucial for the investors by improving their understanding of how to take the right investment

decision that enables them to obtain fair returns. Finally, it is also useful for researchers and

academicians in the field of finance, economics and banking for carrying out further studies in

this area.

1.7 Scope of the Study

This study covered all the fourteen banks in Eldoret Town of Uasin Gishu County. This was

based on the banking sector. It also focused on achieving the five objectives defined by the

factors affecting the performance of commercial banks. Conceptually, this study takes roots in

concept of financial performance and the influencing factors domain and has some narrow ties

with practical theories of some courses like commercial banks performance. Due to financial and

time limitations, it was not be possible to carry out this study on the whole banking institutions in

Uasin Gishu County. Meanwhile, the study was undertaken in 2019, which is sufficient to

perform a scientific research.

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 CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction

The chapter reviews literature from other scholars on the aspect of factors affecting the

performance of commercial banks. It specifically looks at theoretical literature, factors that

include interest rate capping, bank regulations, management efficiency, capital adequacy and

asset quality and the empirical literature, research gap and the chapter summary. Well-defined

measures of commercial banks performance are important for investment managers enabling

them to devise techniques of maintain or sustaining banking performance.

Banks act as a link between the various participants in any given economy (Mugisha, 2017). This

function is accomplished by actualizing provision of avenues for deposit making and in return

the public earns interest on the deposits made. These deposits are generally the public’s savings.

Also, taxes are paid through banks, which make them collection agents for the tax authority.

Apart from that, banks act as a medium for payment of bills and retail store purchases through

the use of credit and debit cards. Moreover, salaries are also processed in the form of direct

debits or transfers. Last but not least, banks extend loan facilities to the general public. These

loan facilities aid individuals and organizations in undertaking various investment opportunities.

The government also benefits as the loan facilities issued to it have been used to finance budgets.

The evolution of Commercial Banks in Kenya dates back to the 1890s. In 1896, the National

Bank of India started its operations in Kenya. Standard Chartered bank previously known as the

Standard Bank of South Africa opened its doors in 1910. In 1916 Barclays Bank was formed

12
following the merging of the National Bank of South Africa and Anglo-Egyptian Bank, CBK

(2013). The banking industry continued to experience an increment in the number of banks being

formed. In Kenya there are a total of 40 commercial banks, with Charterhouse Bank under

statutory management and Imperial Bank under receivership, 1 mortgage finance company, 13

microfinance banks, 9 representative offices of foreign banks, 73 foreign exchange bureaus, 19

money remittance providers and 3 credit reference bureaus. Likewise the financial inclusion in

Kenya has continued to rise, with the percentage of the population living within 3 kilometers of a

financial services access point rising to 77.0% in 2017 from 59.0% in 2013. This has been driven

by digitization, with Mobile Financial Services (MFS) rising to be the preferred method to access

financial services in 2016 (Cytonn Banking Sector Report, 2018).

These commercial banks must operate within some regulated and controlled conditions. Some of

the controls include introduction of interest rate regulations. As such the enactment of the

capping law in August 2016 was meant to cushion the public from being charged high rates of

interest. The banks believed to charge ranging between 19- 24% per annum thus enjoying

interest spreads averaging to 11.4% (www.cytonn.com). These rates were at 6.6% above the

world average. The law was thus enacted and implemented in September 2016 to safeguard the

public from the high rates charged by banks. Banks were therefore required to have lending rates

not exceeding 4% above the CBR currently at 9% and the lowest rate payable to depositors at

70% of the CBR. This is part of regulatory measures that CBK can impose on commercial banks

from time to time.

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The commercial banks took various drastic actions following the enactment of the law. Family

bank issued a profit warning in the last quarter of 2016 and planned to do staff rationalization.

Banks such as KCB, Sidian, NBK, Bank of Africa, Ecobank and Standared Chartered Bank also

announced their cost cutting plans by downsizing the staff numbers. But in March 2017,

President Uhuru Kenyatta while addressing the nation during the state of the Nation address

stated that commercial banks have decreased or slowed down their lending to the public as a

result of capping of interest rates. This slowdown was unfortunate as it wasn’t the intended result

of capping. The Government through the Ministry of Finance and CBK has promised to conduct

an investigation the impact of the capping law on borrowing. Kenya’s growth projection was

recently reduced by World Bank from an estimated growth of 5.9% in 2016 to 5.5%. This

reduction was by 50 basis points and was largely attributed to the capping of interest rates on

loans. Such information marked to beginning of the fall of interest rate capping in Kenya.

The sections that follow below focus on how factors such as interest rate capping; management

efficiency; capital adequacy; bank regulations and asset quality impact on commercial banks

performance.

2.1.1 The Effects of Interest Rates Capping on the Performance of Commercial Banks

Capped interest rate is an interest rate that is allowed to fluctuate, but which cannot surpass a

specified maximum point herein called cap (Maimbo, Henriquez, and World Bank Group, 2014).

It is a ceiling placed on interest rates to dictate the maximum rate that a bank can charge its

customers it lends loans to (Kavwele, D. T., Ariemba, J. M., Evusa Z., (2018). It is normally a

move anticipated to strengthen financial inclusivity and investment. In Kenya, this is a mandate

14
of Central Bank of Kenya (CBK). The Central Bank of Kenya (CBK) on specific economic time

periods sets the regulating tool, the Central Bank Rate (CBR). The CBR is the lowest rate of

interest which CBK charges on loans to other banks and which it is obliged by law according to

section 36(4) of the CBK act to publish.

Interest charged on loans by commercial banks is one source of revenues for banks. While the

regulation is believed to increase inclusivity making many potential borrowers to seek loans and

thereby making banks to earn more; the banks argue otherwise. The commercial banks believe

that capping of interest rates is invariably to have a direct effect on the interest income earned by

the bank. In Japan, for example, commercial banks argued this way but afterwards, the financial

performance reported indicated improved profitability (Miller, H., 2013). It is therefore

important to understand the effect of interest rates capping on financial performance of

commercial, banks in Kenya.

Other aspects of financial performance such as loans performance also need to be investigated.

This is because interest rates capping directly affects loans previously or currently issued.

According to Saunders, M. N. (2011), interest rates capping has no negative impacts on loans.

This is because capping reduces the interest charges that the borrower should pay the lender;

therefore it should encourage the improved loan performances instead. For example, in Malaysia,

when interest rates were capped in the 1994 to 1996, loan performances improved (Mang’eli, M.

Y., 2012 and Ramsay, I., 2010).

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According to Tan, Y., and Floros, C. (2012), interest rate spread affects the performance of

banks` assets by increasing loan costs charged. In Kenya the interest rate spread is usually high

for long-term loans, which limits most clients from accessing loans and therefore leading to non-

performing loans. Interest rate spreads are determined decreased savings, insufficient loans, low

competition in the banking industry, low profits or losses made, uncertainty of macro

environment and the challenges facing the banking system (Hou, 2012). Liang-Liang Xie (2008)

argued that interest rate spread highly contributes to non-performing banks and therefore

affecting bank profitability.

2.1.2 The Effects of Capital Adequacy on Performance of Commercial Banks

The global financial crises spur the need to review the regulatory framework of banks across the

globe. As a result, reforms in the financial sector are necessary to rectify flaws in the regulatory

framework. The major lessons from the global financial crisis revolve around leverage, capital

and liquidity. Athanasloglou, Brismiss and Delis, (2005) define capital as the amount of owner’s

funds that commercial banks use to support their business operations. These funds are also meant

to cushion banks in case of any adverse situations that may occur. The capital adequacy ratio was

a determinant of the internal strength and stability within the bank to withstand losses during

crisis. It’s also a measure on how much of the bank’s assets are funded with owners funds. It’s

derived by the ratio of equity to total assets. Banks that are well capitalized are in a better

position of meeting the capital requirements as stipulated by the central bank. This provides an

avenue for any excess capital to be issued as loans. In cases of general financial crisis banks with

a high capital ratio tend to face a relatively lower financial difficulty.

16
Capital adequacy is an important factor that helps in determining the level of risk absorption of

banking institutions in completing the bigger picture of banking performance (Yahaya, Mansor,

and Okazaki, 2016). Also capital adequacy is closely associated to the economic performance of

related countries. According to Olalekan and Adeyinka (2013) capital adequacy has been a vital

issue for financial institutions and defined capital adequacy as the percentage ratio of financial

institution’s primary capital to its assets used as a measure of its financial strength and stability.

Moreover, capital would be used to absorb an unanticipated abnormal loss in cases where such

losses cannot be absorbed by earnings in financial institutions.

Yet still, the primary function of capital in a financial institution is to provide resources to absorb

possible future losses on assets and financial hardship (Buyuksalvarcı and Abdioglu, 2011). This

makes capital a key role of an insurance function, and therefore capital adequacy in banking is a

confidence booster to customers even in times of financial hardship. Capital adequacy provides

the customer, the public regulatory authority with confidence in the continued financial viability

of financial institutions (Olalekan & Adeyinka, 2013).

According to Olweny and Themba (2011), capital adequacy is the sufficiency of the amount of

equity to absorb any shocks that the bank may experience. CBK issued revised prudential

guidelines on capital adequacy in 2013 (CBK, 2015). This entailed new capital requirement for

banks, capital charge for market and operational risks and capital conservation buffer, the

minimum regulatory capital adequacy requirement, measured by the ratio of core capital and

total capital to total risk. Hence, it measures capital sufficiency in relation to the Basel and CBK

guidelines (Nasieku, 2014; ROK, 2015c).

17
There are two accounting ratios to be used in capital adequacy; leverage ratio and risk weighted

assets ratio, leverage ratio was determined by total capital over total assets and will be used as a

measure of regulatory capital (Nasieku, 2014). Moreover, the risk weighted assets ratio was the

core capital divided by total risk weighted assets, which measures risk-based capital. Capital

adequacy may reflect the inner strength of a bank, which was in good stead when banks are

experiencing a financial crisis (Sangmi, 2010). However, most banks have portrayed behaviours

indicating their inadequacy of capital. This has forced most banks to close down while others

have been put under receivership management in Kenya (CBK, 2015).

Acharya, Pierret, and Steffen (2016) Study was based on the impact of losses of banks in a

stress-test of bank capital. The study based in US banks assessed capital adequacy of banks using

and incorporating leverage ratio, a measure of capital adequacy and the study found out that

leverage ratio had a high negative correlation with capital adequacy of US banks in 2016. In

addition Sangmi (2010) noted that capital adequacy which can be measured by capital adequacy

ratio and leverage ratio has a bearing on the overall performance of a bank like opening of new

branches, fresh lending in high risk and diversification of business.

This project aims to adopt capital adequacy ratio and leverage ratio to measure capital adequacy

as a financial hardship factor on financial performance of commercial banks. This ratio is

determined by dividing tier one and tier two capital by risk weighted assets. Higher percentage

on the ratio would be desirable as banks are assumed to have sufficient buffer against risk

(Adeyemi, 2012; Nasieku, 2014; ROK, 2015; Sangmi, 2010). While Leverage Ratio is

determined by dividing total Capital by Total Assets, Leverage ratio was used as the measure of

18
regulatory capital, higher percentage on the ratio would be desirable as firms are assumed to

have sufficient buffer against risk (Muiruri, 2015; Nasieku, 2014; Sangmi, 2010).

2.1.3 Effect of Asset Costs of Operations on the Performance of Commercial Banks

The costs of developing accounts opening, deposits creation and loans processing are key to the

growth in profitability gaps. Most commercial banks, these costs receive wider attention and

adequate management control is put in place. A bank's managers and owners clearly are

concerned with costs since they are anticipated to eat in the financial performance. A bank's

customers also are concerned, since banking costs ultimately are passed on to users of the bank's

services. This impact could be felt in the financial crisis of the 2008. The unfathomably complex

transactional relationships between banks all over the world meant that the shocks to the

financial system in 2008 reverberated across the globe, and the impact was not confined to the

banking sector itself, but shook the international economy to its core.

The focus in the management of bank deposit operations is an indicator that there are benefits.

However, the inadequacy with which this is pursued is not satisfactory. The relationship between

profitability and the deposit operations costs need to be investigated. Additionally, the deposit

operation automating practice by most banks has received attention. However, the call for this

concern is yet to be determined academically.

2.2 Theoretical Review

This part provides an insight on the theories that are vital to the study. The theories provide a

firm basis of the theoretical background relating to the study.

19
2.2.1 Efficiency Theory

The efficiency theory originated from Demsetz (1973). The theory postulates that the

performance of any bank is defined by the efficiency of the bank. Banks that are efficient tend to

incur low costs which would result in high profitability hence better performance. The efficiency

of banks can also be attributed to better management and investment in production technologies

that have lower costs. With this theory banks can attain favorable levels of production through

economies of scale. The size factor is also considered as large banks are in a better position of

hiring highly qualified management and investing in production technologies that result in lower

operational costs hence leading to higher returns as compared to small banks. This theory

therefore provides an understanding on how bank performance is affected by other factors such

as management efficiency and size hence relevant to the current study.

2.2.2 Buffer Theory of Capital Adequacy

As a consequence of financial distress, financial institutions may prefer to hold a `buffer’ of

excess capital to reduce the probability of falling under the legal capital requirements, especially

if their capital adequacy ratio is very volatile. Capital requirements are one of the main

supervisory instruments in Kenya for financial institutions. According to this theory, capital is

more reliable, dependable and can be used for long term planning. Ability of banks to mobilize

enough deposits obviates the capital base from being eroded. The buffer theory of Calem and

Rob (1996) predicts that a bank approaching the regulatory minimum capital ratio may have an

incentive to boost capital and reduce risk in order to avoid the regulatory costs triggered by a

breach of the capital requirements. However, poorly capitalized banks may also be tempted to

take more risk in the hope that higher expected returns will help them to increase their capital.

20
This is one of the ways risks relating to lower capital adequacy affect banking operations in the

event of bankruptcy of a financial institution (Calem & Rob, 1996).

Calem and Rob (1996)’s model suggested that there will be two aspects of the new regulatory

environment may have unintended effects one being higher capital requirements leading to

increased portfolio risk. The other aspect being that capitalized premier do not deter risk-taking

by well-capitalized banks and tend to promote risk-taking by well capitalized banks which will

tend to promote risk taking among the undercapitalized financial institutions. On the other hand,

risk-based capital standards may have favorable effects provided the requirements are stringent

enough (Calem & Rob, 1996).

This theory indicates that the firm will be in a stable condition in times of low liquidity since

there will be some capital reserves that will ensure the firm meets its obligation when they fall

due using the excess capital recognized as a buffer regardless of the performance thus reducing

the effect of financial distress in a firm. This means that in the absence of a buffer of capital,

firms are likely to fall into financial distress in the future. In addition Berger and Bouwman

(2013) argued that capital helps small banks to increase their probability of survival and market

share at all times (during banking crises, market crises, and normal times). Secondly, capital

enhances the performance of medium and large banks primarily during banking crises. This

therefore makes capital adequacy a significant factor of financial distress.

21
2.2.3 Expense Preference Theory

The expense preference theory originated from Becker (1957) and was further developed by

Williamson (1967). The theory postulates that the main goal of management of a given bank is to

own the utility of the bank. The utility of banks is normally realized by increasing salaries and

other staff related expenses. With this theory the management develops a keen focus on staff

welfare rather than focusing on maximizing profits. These actions by management are normally

done in the short term and eventually result in higher efficiency ratios. These decisions by

management result in banks earning more profits in the long-term hence end up performing

better. It is thus evident that performance of banks is dependent on many factors rather than just

interest rate capping.

The economies of scale theory are closely associated with Emery (1967) and Vernon (1971).

According to this theory, large banks tend to enjoy economies of scale and thus produce services

at lower costs. Large banks are therefore in a better position to offer their services more cheaply

and efficiently as compared to small banks. The end result of this is the high profit margins

earned by large banks. The high profit margin is a clear indicator of better performance.

2.3 Empirical Review

Several studies done in relation to interest rate capping and the performance of commercial

banks both globally and locally. Focusing on the global context, an investigation on the effect of

interest rate capping on performance of banks was conducted by Wild (2012). Wild’s findings

revealed mixed results about the effect of capping of interest rates on performance of banks.

Osei‐Assibey and Bockarie (2013) study findings in the Ghanaian context revealed that when

22
interest rate capping was introduced, banks had a challenge in covering the loan costs since they

are required to charge a lower interest rate.

The banking industry in Kenya, for listed banks, recorded a positive EPS growth of 16.2% in

Q3’2018, compared to a 9.3% decline in Q3’2017. This was an indicator of the diversification

strategies employed by banks in the wake of the interest-rate cap legislation, which was passed in

September 2016, to navigate the relatively tougher operating environment (Cytonn Report,

2018). This is an indication that with interest rate capping, banks are capable of pursuing better

operational avenues to earn their income handsomely. Although the report gives this picture,

there was no mentioning of what diversification tools that were used by these banks. In the local

context we had a study by Wanjare and Motari (2016) on the Interest rate variation and the

profitability of Islamic banks in Kenya. The period under study was 5 years and the average of

the CBR was determined for this period. Financial data was also obtained and analyzed. The

findings of their study revealed that the market interest rate changes had a positive influence on

the profitability of Islamic banks in Kenya.

Njihia (2005) research findings indicated that the loan component has a substantive effect on the

banks profits. He further avers that deposits are crucial in maintaining capital adequacy levels

thus facilitating issuance of more loans. Maigua and Mouni (2016) investigated how the

commercial banks performance in Kenya is influenced by the interest rates determinants. A

descriptive research design was adopted together with multiple regressions as a data analysis

technique. The study revealed that commercial banks performance is positively influenced by

exchange rates, discount rates and inflation rates. The increase was on the back of a 3.8%

23
increase in Net Interest Income (NII) coupled with a 5.9% growth in Non-Funded Income (NFI)

as banks adapted to operating under the interest rate cap regime. The Net Interest Margin (NIM)

decreased to 8.0% in Q3’2018 from 8.5% in Q3’2017. It means that the sector had an

improvement in operating efficiency as the Cost to Income Ratio (CIR) declined to 56.3% in

Q3’2018 from 59.8% in Q3’2017, amid cost rationalization measure such as branch closures,

staff layoffs in voluntary retirement plans and digitization strategies aimed at reducing

operational costs. However, these listed banks recorded a slow net loans and advances growth of

4.2% y/y to Kshs 2.0 trillion in Q3’2018 from Kshs 1.9 trillion in Q3’2017. Deposits grew at a

faster rate of 7.4% y/y to Kshs 2.6 trillion in Q3’2018 from Kshs 2.4 trillion in Q3’2017. But the

sector had an improved profitability y/y, as shown by the rise in the Return on Average Equity

(ROaE) to 18.8% in Q3’2018 from 17.5% in Q3’2017.

Mang’eli (2012) carried out a study that examined the relation between interest rate spread and

financial performance of commercial banks. Mang’eli’s findings established that performance of

commercial banks is significantly affected by the interest rate spread as they tend to increase the

cost of loans. In addition, Mang’eli discovered that regulations on interest rates tend to determine

the interest rate spread in banks which has an effect on performance of commercial banks. His

findings also revealed that the techniques employed in managing credit risk tend to have a

remote effect on the value of a bank’s interest rate spread. This is largely due to benchmarking of

interest rate against the associated non-performing loans. In addition, it is evident that the

performance of commercial banks was also affected by the provisions made on non-performing

loans in those financial institutions.

24
The study is anchored on financial intermediation theory and the modern portfolio theories. The

approach of financial intermediaries based on the method of regulation of the monetary creation,

of saving and financing of economy was developed by Guttentag, and Lindsay (1968) and by

Merton (1995). It involves the matching of lenders with savings to borrowers who need money

by an agent or third party, such as a bank. The money that commercial banks lend out attracts

some income as interest income from which they derive profit and fund their operations. Interest

income depends the interest rate charged on the money lend out.

Through the interest rate capping law in Kenya, loan interest rates were controlled in that it

should not be more than 4% above the CBR set and published by the Central bank of Kenya. The

law also affected interest expense as the interest rate paid by banks on deposits are to a

prescribed minimum of 70% of the CBR set and published by CBK. This consequently affects

the performance of commercial banks as they cannot set interest rates that will give them the

desired margins. The current interest rate spread is currently at 7%.

Akhtar and Hayati (2016) used an empirical Study on Islamic banking system of Pakistan in

assessing the effect of asset quality, income structure and macroeconomic factors on insolvency

risk to determine the insolvency risk in Islamic banking system of Pakistan for the years 2007 to

2015. To determine the insolvency risk in Islamic banks of Pakistan, a variety of bank specific

and macroeconomic variables were used to estimate the impact. The results were obtained using

OLS estimation.

25
Several studies have been done in the area of capital adequacy on performance of various firms;

Ikpefan (2013) examined the impact of bank capital adequacy ratios, management and

performance in Nigerian commercial banks from 1986 to 2006. The study captured performance

indicators and employed cross sectional and time series of bank data from the central bank of

Nigeria, the study concluded that shareholders fund/total assets that measures capital adequacy

of bank have negative impact on ROA. This study was carried out using data in Nigeria and in

addition it did not link capital adequacy with financial hardship in the Kenyan banking industry

and therefore the current study will try to bridge this gap.

Buyuksalvarcı and Abdioglu (2011) investigated the determinants of Turkish banks’ capital

adequacy ratio and its effects on financial positions of banks covered by the study; data in the

study was obtained from banks’ annual reports for the period 2006 to 2010. Panel data was used

to analyze the relationship between the variables. Buyuksalvarcı and Abdioglu (2011)

established that loan, return on equity and leverage has a negative effect on capital adequacy

ratio while loan reserve and return on assets positively influence capital adequacy ratio.

Adeyemi (2012) examined bank failure in Nigeria as a consequence of capital inadequacy, lack

of transparency and non-performing loans. The aim of the study was to establish the main factors

responsible for bank failure in Nigeria, to assess the extent to which these identified factors are

accountable for this failure and to ascertain other factors that may be responsible for it. The study

identified capital inadequacy, lack of transparency, and huge non-performing loans as a major

cause of failure in Nigerian banks. Adeyemi (2012) claimed that financial institutions are

26
expected to maintain adequate capital in order to meet their financial obligations, operate

profitably and contribute as a result a sound financial system.

The study by Adeyemi (2012) adopted a structured questionnaire and covered all banks in

Nigeria. Adeyemi (2012) concluded that capital inadequacy, lack of transparency and huge non-

performing loans were established as the main causes of bank’s poor performance in Nigeria.

The study indicated that capital adequacy is a factor of financial performance. However, the

study did not link capital adequacy as a financial hardship factor on financial performance,

further the study was based on data in Nigerian commercial banks.

Mathuva (2012) examined capital adequacy, cost income ratio and performance of commercial

banks as a Kenyan scenario. The study was informed on provision of evidence that supports the

central bank of Kenya’s move to gradually raise bank capital level requirement and to also

ensure proper and tight monitoring of banks operations. Mathuva (2012) used return on assets

and the return on equity as a measure of bank profitability and consequently bank performance

for the period between 1998 and 2007, Mathuva (2012) concluded that bank profitability is

positively related to core capital ratio.

In Kenya, the core capital and total capital to total risk weighted assets ratios as at December

2014 were 15.9 percent and 19.2 percent respectively. This was due to increase of capital levels

by various financial institutions through retained earnings and additional new capital, financial

institutions are therefore required to maintain a core capital to deposit ratio of not less than 8

percent (CBK, 2015). According to Mathuva (2012), an increase in capital will raise the

27
expected earnings by reducing the expected costs of financial hardship. Mathuva (2012) linked

capital adequacy to financial hardship but the study did not determine the extent of capital

adequacy as a financial hardship factor to financial performance of commercial banks.

Nzioki (2011) examined the relationship of capital adequacy and asset quality on performance. A

simple random sample of five listed commercial banks was used to collect data for six years

(2004 to 2009) and a descriptive design used. The study described the relationship between asset

quality and banks performance and the relationship between capital adequacy and the financial

performance. The study concluded that capital adequacy influences performance of commercial

banks in Kenya, and greater bank capital reduces the probability of financial hardship.

Ongore and Kusa (2013) examined the determinants of financial performance of commercial

banks in Kenya. The study used a linear multiple regression model and generalized least square

on panel data and established that specific factors significantly affect the performance of

commercial banks in Kenya except for liquidity variable influenced performance, and

specifically noted that capital adequacy significantly affect the performance of commercial banks

in Kenya. The study however failed to determine the effect of capital adequacy as a financial

hardship factor on financial performance of the Kenyan banking industry.

The above studies on capital adequacy and financial performance mainly focused on results of

foreign countries like; Ikpefan (2013) and Adeyemi (2012) for Nigeria and Buyuksalvarcı and

Abdioglu (2011) for Turkey. Mathuva (2012) and Nzioki (2011) were based on the relationship

between financial performance and capital adequacy, while Ongore and Kusa (2013) was mainly

28
based on determination of capital adequacy as determinant of financial performance of

commercial banks in Kenya. Findings of these studies did not link the effect of capital adequacy

of commercial banks as a financial hardship factor on financial performance of the Kenyan

banking industry. However, from the above studies it can be argued that capital adequacy is a

factor of performance.

One of the major firm specific factors that influence the financial performance of commercial

banks is the cost of operations. The operating costs of a bank are normally expressed as a

percentage of the profits and they are normally expected to influence the financial performance

of the bank in a negative manner (Swarnapali, 2014). In the literature in financial performance,

the level of operating expenses is normally looked at as a way of measuring the efficiency of a

firm’s management. Memmel and Raupach (2010) in their study of several European countries

conclude that “operating costs have a negative effect on profit measures despite their positive

effect on net interest margins”. Another dimension of operating costs is that the bank expenses

are considered to influence the financial performance of commercial banks and this is supported

by Rasiah (2010) whose study showed that there is a negative relationship between the financial

performance of commercial banks and the management of their expenses. Efficiency in cost

management is normally measured as a ratio (operating costs to assets). This is due to the fact

that only operating expenses can be directly associated to the outcome of bank management

(Athanasoglou, Brissimis and Delis, 2008). This has resulted in a negative relationship due to the

fact that improved management of bank expenses lead to improved efficiency and thus improved

profitability ratios.

29
In general performance management of organizations, high cost of operations lead to lower profit

margins since it means that the organization is spending more in order to get output. It is

important to note that due to competition and market regulations, a bank that is faced by high

cost of operations cannot pass the whole burden to the customers through increasing the bank

fees and charges and therefore this means that the bank has to shoulder it. Increased costs affect

the left side of the profit and loss statement and this means that the profits realized will be lower

than in a case where the costs of operations are lower. Commercial banks that are interested in

achieving high financial performance or profitability need to develop ways of ensuring that their

costs of operations are maintained at an acceptable level. Firms that are able to minimize their

costs of operations are considered to be more efficient and it is also expected that they post

higher profits margins than their counterparts that have higher costs of operations (Athanasoglou,

et al., 2008).

2.4 Conceptual Framework

A concept is an abstract or general idea inferred or derived from specific instances (Kombo &

Tromp, 2009), unlike a theory, a concept does not need to be discussed to be understood

(Durham & Stokes, 2015). A conceptual framework is a device that organizes empirical

observations in a meaningful Structure (Shapira, 2011). Childs (2010) argued a conceptual

framework to be a set of broad ideas and principles taken from relevant fields of enquiry and

used to structure a subsequent presentation.

When clearly articulated, a conceptual framework has potential usefulness as a tool to assist a

researcher to make meaning of subsequent findings. It forms part of the agenda for negotiation to

30
be scrutinized, tested, reviewed and reformed as a result of investigation and it explains the

possible connections between the variables (Durham & Stokes, 2015). Conceptual frameworks

are pivotal to research as they clarify and integrate philosophical, methodological and pragmatic

aspects of doctoral thesis while helping the profession to be seen as a research-based discipline,

comfortable with the language of meta-theoretical debate (Sykes & Piper, 2015). A conceptual

framework for the present study shows the effect of financial hardship factors on financial

performance of commercial banks in Kenya and has been depicted in Figure 2.1 below. Figure

2.1 conceptualizes that factors of (interest rate capping, management efficiency, asset quality and

capital adequacy) influence on commercial bank performance in Kenya.

Figure 2.1: Conceptual Framework

Interest Rate Capping (IRC)
Performance of Commercial
Banks
Capital Adequacy (CA) Return on Capital-ROC
Return on Equity-ROE
Costs of Operations (CP)

Source: Author’s Graphical Visualisation of the Topic, 2019

2.5 Critical Review of Literature

A number of researches have been done relating to financial performance, financial hardship and

financial factors. Specifically, several authors have discussed the relationship of various

variables and financial performance, but not on the effect of financial hardship factors on

financial performance of commercial banks in Kenya. Ntoiti (2013) sought to establish

determinants of financial hardship in local authorities in Kenya yet in the new constitution, the

31
local authorities were abolished. Kosikoh (2014) sought to establish determinants of financial

hardship on insurance companies. Shaukat and Hina (2015) sought to determine the impact of

financial hardship on financial performance of the corporate sector in Pakistani. Memba and

Abuga (2013) examined causes of financial hardship and its effects in firms funded by Industrial

and Commercial Development, a Survey of Firms Funded by Industrial and Commercial

Development in Kenya.

Studies have concluded that there is a positive relationship between liquidity and performance,

specifically; (Cheluget et al., 2014; Ndirangu, 2013; Njeru, 2016; Omondi & Muturi, 2013)

while other studies concluded that liquidity had a negative relationship on financial performance;

(Ahmed, 2014; Kibuchi, 2015; Mwangi, 2014; Ongore & Kusa, 2013). However, the study

conducted in China and Malaysia found that liquidity level of banks has no relationship with the

performances of banks (Said & Tumin, 2011).

Opler and Titman (1994) and Pranowo and Manurung (2010) studied the relationship of leverage

and distress and found out that leverage had a positively significant relationship with distressed

firms but not for Kenyan banks. Anjum and Malik (2013) evaluated the financial difficulties of

Pakistani firms that were listed on Karachi Stock Exchange (KSE) and not Kenyan firms. The

study noted that leverage is positively significant to the financially distressed firms in Pakistan’s

stock exchange. However, Zeitun and Saleh (2015), Razak (2012), Tan (2012), Omondi and

Muturi (2013) found that leverage is negatively associated with firm performance.

32
Okello (2015) concluded that leverage was the strongest determinant of the financial risk of the

listed companies and could easily influence financial hardship in listed companies in Kenya

since more debt financing implies higher possibilities of default hence higher risk. Kosikoh

(2014) concluded that there exist a positive relationship between leverage and financial hardship

on Insurance companies in Kenya and not on commercial banks in Kenya. Nyamboga, Ongesa,

Omwario, Nyamweya, Muriuki and Murimi (2014) found out that leverage does not have

significant influence on corporate financial hardship. Other studies reviewed largely focused on

micro/macro-economic factors, intellectual capital in the Greek business, absorptive capacity,

financial factors, banking sectorial factors, innovation, internal controls and Central Bank

regulatory requirements on financial performance of commercial banks (Kariuki 2013; Kinyua,

2015; Kostopoulos et al., 2011; Maditinos, 2011; Ngumi, 2013; Shaukat & Hina, 2015; Tan,

2012). These studies failed to show the contribution of financial hardship factors on financial

performance of commercial banks in Kenya.

Further studies like those of Shaukat and Hina (2015), Kariuki (2013), Baimwera and Muriuki

(2014) used Altman Z-score model which was mainly developed for public manufacturing firms

with assets of over $ 1 million (Acharya et al., 2016). According to Mamo (2011) Altman Z-

Score model cannot be a perfect measure of financial hardship of commercial banks and the

model cannot perfectly identify key financial hardship factors that can influence financial

performance of commercial banks in Kenya. Other studies that linked financial hardship and

commercial banks were based on foreign financial institutions that limit the application of

research to Kenyan banking industry.

33
2.6 Knowledge Gaps

In the last few decades, numerous studies have been examined on financial hardship in various

countries all over the world. Altman in 1968 studied financial hardship and corporate failure and

developed models of determining whether a manufacturing firm is facing bankruptcy or not.

Previous studies carried out were on macro-economic variables in identification of financial

hardship in United Kingdom (UK) for manufacturing firms (Abuzayed, B. (2012), and not on

banking industry in developing countries, effect of financial hardship on performance of

Malaysian manufacturing firms and prediction of financial hardship and identification of

potential mergers and acquisition targets in UK.

Studies on financial hardship in Kenya have largely focused on local authorities, insurance

companies, and non-financial firms listed in NSE and causes of financial hardship. Studies on

financial institutions have mainly focused on financial performance of only commercial banks

specifically on the effect of; micro/macro-economic factors, financial factors, banking sectorial

factors, innovation, internal controls and Central Bank regulatory requirements on financial

performance of commercial banks.

From the review of relevant literature, shown above, it is evident that research in the area of

financial hardship had been done but not in a comprehensive approach for developing countries.

In addition, there were inadequate studies on the effect of key financial hardship factors in

banking industry. This study therefore sought to fill the knowledge gap of identifying key

financial hardship factors from the literature review and their effect on financial performance of

commercial banks in Kenya.

34
2.7 Summary of Literature

This chapter will identify and discuss both the literature and empirical review that is relevant to

financial hardship factors and financial performance of commercial banks in Kenya. The

literature review indicated that interest rate capping, management efficiency, asset quality and

capital adequacy all of which are the specific objectives of the study are among the factors that

can influence performance of commercial banks. The literature review chapter examined their

role on financial performance of Commercial banks in Kenya; this chapter developed and

presented a conceptual framework.

35
 CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 Introduction

This chapter provides research methodology that was used to collect data for the study. It also

covers data collection and administration of the questionnaire, pilot study, validity and

reliability, data analysis and ethical consideration.

3.2 Research Design

The study adopted cross-sectional case design. This design was preferred because the study aims

at establishing the factors affecting the performance of commercial banks. According to Cooper

& Schindler (2003) descriptive study is concerned with finding out who, what, where, when and

how much of a phenomenon, which was the concern of the study. A descriptive survey was

considered appropriate as it enabled the researcher to collect a considerable amount of

information required for generalization.

This study was done in commercial banks operating at Eldoret Town. The town is served by the

mainstream banks and other microfinance institutions. The town has various financial institutions

offering financial services including banks and non-banking financial institutions such as

insurance, and micro-financial institutions. The Eldoret town is very populated and thus the

institution providing financial services should meet the needs of all town residents competitively.

The target population was drawn from selected fourteen (14) banking organizations with national

outlook and operating in Transnational Bank. The main banking organizations that included

Kenya Commercial Bank, Cooperative bank of Kenya, Barclays Bank, Standard Chartered Bank,

36
Equity Bank, Family Bank, K-Rep, Faulu, Rafiki, Transnational Bank, Bank of Africa, National

bank of Kenya, Commercial Bank of Africa and Kenya Women Finance. The population of this

study was all employees of these fourteen institutions. This was composed of all human resource

officers and staff. This is presented in Table 3.1.

Table 3.1: Target Population of Selected banking Institutions

No. Firm Name Target People

1. Kenya Commercial Bank 10
2. Cooperative bank of Kenya 10
3. Barclays Bank 5
4. Standard Chartered Bank 5
5. Equity Bank 10
6. Family Bank 4
7. K-Rep 4
8. Faulu 4
9. Rafiki 4
10. Transnational Bank 4
11. Bank of Africa 5

12. National bank of Kenya 10

13. Commercial Bank of Africa 5
14. Kenya Women Finance 5
Total Target Population 85
Eldoret town is situated in Uasin Gishu County and serves both rural and an urban population.

This is because all the Sub Counties or constituencies in the county starts from the town all the

way to rural regions. Therefore all challenges such as poverty, financial inclusion, investment,

agriculture, business start ups and job opportunities are among current economic, political and

social concerns affecting residents of Eldoret town. The town has a number of mainstream banks

and microfinance institutions. These microfinance institutions target peri-urban dwellers for

financial services and products access.

37
3.3 Target Population and Sample Frame

A population is the total collection of elements about which one wishes to make some inferences

(Cooper and Schindler, 2010). It represents an entire group of objects of concern, individuals,

events or objects having a common observable characteristic. Kothari (2004) describes a census

as a complete enumeration of all items in a population. The sampling frame for this project study

was carefully considered to allow for collection of a statistically useful and adequate number of

responses so that differences among potential geographic and financial institution size

stratification schemes could be examined. For this study, the sample frame was commercial

banks operating in Eldoret Town. The sampling frame is the list of banks from the database of

the Kenya Bankers Association with branches in Eldoret Town (the planned and realised sample

size is 3 banks). These include KCB Bank, Barclays Bank and Equity Bank that operate retail

bank offices. Screening criteria was used to determine the sample frame of banks with retail

operations operating in Eldoret Town.

This project study took painstaking efforts to identify a well-defined and observable target

population. Such population was defined as including those individuals who are knowledgeable

about the formulation and implementation of bank branch policies and programs at any point

between 2010 and 2019.

Respondents were selected (chief economist, branch managers; branch policy makers; and

investment and credit managers; credit control officers; bank operations managers and

investigation officers; department manager or head of division, or a person competent to respond

to the questionnaire) to participate in the survey in the observed period, during which it is to

38
check whether answers are given by the same respondent each time (Cooper and Schindler,

2010). The target respondents included from each bank. This led to a target population of 100

possible respondents.

3.4 Samples and Sampling Procedure

A sample is a part of the target population carefully selected to represent that population (Cooper

and Schindler, 2010). By observing the samples, certain inferences may be made about the

population (Best, 1977). According to Van Dalen (1966), there are four major steps of sampling.

These included defining population of study, procuring an accurate complete list of the units in

the population, drawing representative units in the list and obtaining sufficiently large sample to

represent the characteristics of the population.

Empirical study by Roscoe (1975), suggests that sample size should be larger than 30 and less

than 500. Guided by this, the sample size for this research is 85 which are within the empirical

limits. This sample size produced adequate data for analysis and in making conclusive

generation. Stratified random sampling method was used to select projects to ensure that all

different subgroups are adequately represented in the sample, and then simple random sampling

method was used to select respondents from various strata. Gay (2002) identifies random

sampling as the best form of sampling as it allows all members of population to have an equal

and unbiased chance of appearing in the sample.

39
A probability sampling technique was used where the selected populations of respondents were

considered as shown in Table 3.2. A stratified random sampling technique was used to obtain

samples from each cluster.

The sampled population was stratified into human resource senior, middle and junior managers

and staff. They were selected to form the sampled population for the study. The evidence of

HRD mandate capability was identified as zero, successful, highly successful and very high

successful. This subsection covers the sample size and sampling technique. A sampling frame

according to Cooper and Schindler is a list of elements from which the sample is actually drawn

and is closely related to the population. A sample size was determined based on these registrants.

A formula propounded by Cochran (1963; 1977) was used to determine the size as follows;    

Where; n – is the sample size

N – is the population size

℮ – is the level of precision (95%; e = 0.05)  

Given that N=85 (see Table 3.2 and 3.3)

℮2 = 0.052

Therefore n= 85÷ (1+ (85*0.052)= 70.103, hence from the above a sample of 70 respondents that

was selected for the study. A sample size of 70 participants were therefore be selected (Table

3.2). The Institute of Economic Affairs (2009) defines a sample size as a function of logistics and

homogeneity or heterogeneity of the population. According to Sekaran (2006) adequacy, means

the sample should be big enough to enable reasonable estimates of variables to be obtained,

capture variability of responses and facilitate comparative analysis. Kothari (2004) recommends

40
any large sample to be at least 10% of the target population. The sample of 70, which is 82.0% of

target population, was therefore expected to adequately address the objectives of the study. The

sample was deduced from the Population using stratified sampling (Kerry and Bland, 1998). This

reduces standard error by providing some control over variance. Three strata was developed that

include project managers, the public and county government members. This means that each

stratum has the same sampling proportion (Stattrek, 2009). According to Birchall (2009)

proportionate stratification provides equal or better precision than a simple random sample of the

same size, the gains in precision are greatest when values within strata are homogeneous and

those gains in precision accrue to all survey measures.

Stratification was necessary to carefully select and capture all stakeholders involved in

development projects works in Transnational Bank who can demonstrate performance of the

project implemented. The strata sizes are provided in Table 3.2, and formed the population

frame. At least 10% sample of the population was considered a generally acceptable method of

selecting samples in such a study (Stanley & Gregory, 2001; Kothari, 2004). Kerlinger (2009)

states that a 10% sample allows for reliable data analysis and provides desired levels of accuracy

for testing significance of differences between estimates. The sub-sample in each stratum is

calculated by multiplying the stratum population with the sample proportion as shown in Table

3.2.

41
Table 3.2: Sample Size and Sampling Procedure

No. Firm Name Target People % Sample Size

1. Kenya Commercial Bank 10 .82*10 08
2. Cooperative bank of Kenya 10 .82*10 08
3. Barclays Bank 5 .82*5 04
4. Standard Chartered Bank 5 .82*5 04
5. Equity Bank 10 .82*10 08
6. Family Bank 4 .82*4 03
7. K-Rep 4 .82*4 03
8. Faulu 4 .82*4 03
9. Rafiki 4 .82*4 03
10. Transnational Bank 4 .82*4 03
11. Bank of Africa 5 .82*5 04
12. National bank of Kenya 10 .82*10 08
13. Commercial Bank of Africa 5 .82*5 04
14. Kenya Women Finance 5 .82*5 04
Total 85 82% 70

Table 3.3: Stratified Sample Size Procedure

Target Sample size Sample

Category of Population % Determination Size
1. Senior 15 .15*70 11
2. Middle 20 .20*70 14
3. Line Managers 25 .25*70 18
4. General Operations staff 40 .40*70 28
Total 100 70
Source: Author (2019)

3.5 Instrumentation

The instruments that were used in collecting primary data are questionnaires and interview

schedule. The questionnaires covered areas of study objectives and the conceptual framework.

The respondents were required to fill the questionnaire by providing the desired information

useful for problem of the study. The questionnaire was the main tool used supported by interview

schedule. The questionnaire consisted of both structured and unstructured questions and

statements.

42
Both structured and unstructured questions were used to obtain primary data from respondents.

According to Kothari (2004), a questionnaire is a popular method of collecting data. Further

Kerlinger (1973) asserts that a questionnaire is an appropriate data collecting instrument. It gives

the respondent time to give out well thought answers and also effective when analyzing collected

data especially using computer coding. This was applied to sampled respondents.

The pilot study was done in Lodwar Town of Turkana County. The participants in the pilot study

did not participate in the actual study. Pilot studies accumulate data from the ultimate subjects of

the research project to serve as a guide for the larger study (De Vos, et al., 2007; Zikmund,

2003). The participants were randomly selected to test the questionnaire to determine any

necessary revisions needed to be made before actual administration of the questionnaire (Burns

and Bush, 2010; Sarantakos, 2000). Although the selected instruments can be valid, their face

and content validity was established again by a panel of expert. This was done by generally

asking a series of questions as well as look for answers in the research of others (Orodho, 2008).

Therefore validity of the instrument was realized after the researcher had examined the content

of the instruments, through judgment of experts and the supervisors’ validations, which guided

the researcher on the content validity.

The study also applied different techniques to assess the Cronbach’s (1951) reliability coefficient

alpha and to assess face and construct validity. In order to ascertain face validity, an initial

questionnaire was passed through the routine editing after it was given to the panel of experts.

They were asked to respond to the questionnaire. The results determined the degree of comments

43
as were received and needed adjustments were done according to the comments from the panel

of experts to enhance the clarity.

The reliability of the questionnaire was determined using a sample of respondents. The items

were measured by a 5-point Likert-scale, which ranges from strongly disagree (1) to strongly

agree (5). Also a reliability analysis was done subsequently using Cronbach’s Alpha to measure

internal consistency. This helped to determine if certain items within a scale measure the same

construct. A reliability test was done using Cronbach's alpha test. The main objective of this test

was to measure the internal consistency of the study components, which is, how closely related a

set of components are as a group.

3.6 Data Collection

The closed-ended questionnaire forms were distributed after the consent of the respondents

obtained. This provided more structured responses to facilitate tangible recommendations. The

closed ended questions were used to test the rating of various attributes and this helped in

reducing the number of related responses in order to obtain more varied responses. The open-

ended questions also provided additional information that may not have been captured in the

close-ended questions. The questionnaire was carefully designed and tested with a few members

of the population for further improvements. This was done in order to enhance its validity and

reliability of data collected for the study.

44
3.7 Data Analysis Technique

The questionnaires collected were counted to ensure that all respondents have answered and

completed the questions. Before processing the responses, the completed questionnaires were

edited and coded for completeness and consistency. With the aid of SPSS version 25, the

complete and consistent questionnaires were entered into the computer for further analysis. This

created order, structure and meaning to the mass of collected data (De Vos, et al., 2007). The

data was then coded to enable the responses to be grouped into various categories. Descriptive

and inferential statistics were used to analyze the data. Descriptive statistics included the

frequencies, mean and standard deviation.

All quantitative data were measured in real values by normalizing. Both descriptive and

inferential tests were used in the analysis. The frequency distribution Tables and other graphical

presentations as appropriate were used to present the data collected for ease of understanding and

analysis. Moreover, this project employed data with an aim of presenting the research findings in

respect to the factors affecting the performance of commercial banks. Tables were used to

summarize responses for further analysis and facilitate comparison. This generated quantitative

results through tabulations, percentages, and measure of central tendency.

45
 CHAPTER FOUR

DATA ANALYSIS, PRESENTATION AND INTERPRETATION

4.0 Introduction

This chapter comprises the analysis, presentation and interpretation of the findings resulting from

this study. These are presented under the headings: response rate, demographic information,

information on the performance of commercial banks and the results about the factors affecting

that performance. Qualitative and quantitative data were analyzed and presented. This study

investigated the factors affecting performance of commercial banks in Eldoret Ton. The research

questions that were pursued included:

i) What are the effects of interest rates capping on the performance of commercial banks in

Eldoret Town of Uasin Gishu County, in Kenya?

ii) In which ways do Capital Adequacy affects the performance of commercial banks in

Eldoret Town of Uasin Gishu County, in Kenya?

iii) What are the effects of Costs of Operations on the performance of commercial banks in

Eldoret Town of Uasin Gishu County, in Kenya?

4.1 Response Rate

The response rate of the respondents is important to this look at because it displays the in-depth

of the information accrued. Questionnaire forms were used to gather information required for the

take a look at and a total of 70 questionnaire forms were dispensed to the commercial bank staff

in Eldoret Town, Uasin Gishu County.

46
Table 4.1 Response Rate of Respondents

Participant Type N Returned Not Returned Sub-Total

Senior Managers 11 10(14.3%) 01(1.4%) 11(15.7%)

Middle Managers 14 14(20.0%) 00(0.00%) 14(20.0%)

Line Managers 18 15(21.4%) 03(4.3%) 18(25.7%)

Operational Staff 28 26(37.2%) 02(2.8%) 28(40.0%)

Total 70 65 (92.8%) 05 (07.2%) 70 (100.0%)

4.2 Demographic Characteristics

Finding out the general information of the respondents is very important because it enables the

researcher to gauge the reliability of the data received and know the type of people that he/she is

dealing with. This information included gender, age bracket of respondents, highest level of

education and the duration at the current employment.

4.2.1 Gender of Respondents

The question sought to establish gender involvement in the study. The results in Figure 4.1 show

that female were represented by 60.0% and formed the bigger population with 40.0%

representing male. This was appropriate since of the total population of 70, female are 42(60%)

while female are 28(40%). This showed that both the gender groups were equitably and

appropriately represented in their ratios. This can be attributed to the fact that the institution used

in this study was a female dominated both in customers and employees that participated in this

survey are majority females, however, in some cases today gender parity has not been

experienced, and gender factor was an important aspect of mobile money transfer services usage.

47
Figure 4.1: Illustration of Respondents’ Gender Representation

4.2.2 Respondents Age Bracket

The research sought to find out the age bracket of the respondents. From the results in Table 4.2,

18-24 represented 25.8%(17), 25-34 44%(29), 35-44 10.4%(08), 45-54 10.8%(09), 55-above

years accounted for 09.0% (06). This indicated that majority of participants were aged between

age bracket 25-40 years old. This is a reflection that the participants in this study were in their

middle age at the time of this study.

Table 4.2: Distribution of Respondents’ Age Bracket

Age Bracket Frequency Percent Valid Percent

Valid 18-24 17 25.8 25.8

25-34 29 44.0 44.0

35-44 08 10.4 10.4

45-54 07 10.8 10.8

55-Above 06 09.0 09.0

Total 65 100.0 100.0

48
4.2.3 Respondents Level of Education

The study sought to find out the highest level of education of the respondents. Education level is

important since this would influence an individual desire and interest of technological

application in various daily activities including banking and financial services. The results were

as shown in Table 4.3.

Table 4.3: Distribution of Respondents’ Level of Education at the time of this study

Frequency Percent Valid Percent

Valid Certificate 14 20.7 26.7

Diploma/Higher Diploma 23 35.3 45.3

Bachelors Degree 20 31.3 9.3

Masters Degree 03 04.7 4.7

Doctorate Degree 05 08.0 8.0

Total 65 100.0 100.0

From the results in table 4.3 above, those with certificate qualification accounted for 20.7%(14),

diploma or higher diploma 35.3%(23), bachelors degree 31.3%(20), masters degree 04.7%(03)

PhD accounted for 08.0%(05). This showed that many participants in this study had diploma or

higher diploma level of education, followed by bachelors’ degree, at the same time PhD also

accounted for a significant proportion of the respondents.

4.2.4 Respondents Position Held

This study also sought to establish the position held by participants during the time of filling the

questionnaire of this study; the results are as shown in Table 4.4.

49
Table 4.4: Frequency Distribution of Respondents Position Held

Position Frequency Percent

Valid Senior Managers 01 01.6

Middle Level Managers 08 12.3

Line Managers 20 30.8

Operational Staff 36 55.4

Total 65 100.0

The results in Table 4.4 show that Senior Managers accounted for 01.6%(01), middle level

managers 12.3%(08), line managers 30.8%(20) and operational staff accounted for 55.4%(36).

This implies that operational staff was the highest reported with 55.4% an implication that the

results are influenced by the opinions of the operational staff. Since they are the implementers of

any policy, whether interest rates changes, cost of operations or capital adequacy; it is a proof

that the information gathered were obtained from the relevant and reliable sources.

4.2.5 Respondents Duration in the Current Post Held

This study also sought to establish the length of time participants have taken in their current

designations; the results were as shown in Table 4.5.

Table 4.5: Frequency Distribution of Respondents’ Duration in the Post

Duration in the post Frequency Percent

Valid recently appointed 03 04.3

Less than 1 year 15 23.1

50
 1-3 years 14 22.2

4-6 years 24 36.8

6-above years 09 13.7

Total 65 100.0

The respondents also indicated in Table 4.5 that this positions have been held by the current

holder on a recently appointed 04.3% (03), less than 1 year 23.1% (15), 1-3 years 22.2% (14), 4-

6 years 36.8% (24), 6-above years 13.7% (09). This implies that 4-6 years length of stay in

current post was the highest reported with 36.8%. this could infers that the senior posts holders

have been held in the institution for more than four years period providing good experience on

the way towards technological application in providing banking and financial services and

products to the customers.

4.3 Commercial Banks Performance

The study sought to determine the performance of the commercial banks and there were various

indictors that were used to measure this performance. The dependent variable of the study was

the Commercial Bank Performance. This variable had three dimensions that included return on

capital, return on equity and return on assets. The section also considered 17 items of measure of

performance within these three dimensions. The results are presented in the sections that follow:

4.3.1 Products Review Frequency

In order to determine the degree of importance of the dimensions, this section sought to find out

the way respondents considered these items one by one. The results are as shown in Table 4.6.

51
Table 4.6: Importance of Commercial Bank Performance Dimensions

Dimension 4 3 2 1 Total

Return on Capital-ROC 52(80.0) 8(12.0) 4(6.0) 1(2.0) 65 (100)

Return on Equity-ROE 55(84.0) 5(8.0) 3(5.0) 2(3.0) 65 (100)

Returns on Assets-ROA 46(70.0) 9(13.0) 6(9.0) 5(8.0) 65 (100)

4=Very Important, 3 Important, 2= Not Important, 1=Hardly Important

The results from Table 4.6 show that respondents opinion on importance of commercial bank

performance indicate that those who stated hardly important accounted for 2.0%(1), not

important 6.0%(4), important 12.0%(8) while very important accounted for 52(80.0%) that

Return on Capital (ROC- both short term and long term) is an important factor of commercial

bank performance. This implies that majority, 80.0%(52), of the respondents believed that return

on capital is very important measure of commercial bank performance. This infer that in order to

generate more income, and even revenue that cover all the operating and business expenses, then

commercial banks must ensure that return on capital is sustainably stronger and stable. Such a

measure may also be considered very important because they also determine the capability to a

business to meet shareholders investment objectives.

On the Return on Equity (ROE- long term owners investment), the results in Table 4.6 indicate

that those who stated hardly important accounted for 3.0%(2), not important 5.0%(3), important

8.0%(5) while very important accounted for 84.0%(55). This implies that majority 84.0%(55) of

the respondents, stronger than the return on capital (short term and long term), is a very

important aspect of determining commercial bank performance. It is what goes directly to the

shareholders pockets. Moreover, in relation to Returns on Assets (ROA-the total worth of

52
business both current and non-current resources), those who stated hardly important accounted

for 8.0%(5), not important 9.0%(6), important 13.0%(9) while very important accounted for

70.0%(46). This infers that majority 70.0%(46) of the respondents were of the opinion that return

on assets is a very important measure of commercial bank performance.

These imply that those with very important opinion were the majority, inferring that all the three

dimensions of commercial, bank performances were very important. The results are also

indicating varying trend on the importance of these variables. The results indicated that all the

opinions on very important were above 50.0%, an indication of strong opinion expressed by the

respondents. Moreover, the highest reported dimension as critical to commercial bank

performance return on equity 84.0%(55), followed by return on capital 80.0%(52), then return on

assets 70.0%(46). These findings concur with the findings of Calice, P., (2016) who found out

that performance of financial institutions is measured by varied factors and earnings are not the

only measure. However other findings indicated that commercial bank performance include only

income and expenses.

4.3.2 Commercial Bank Performance

This section sought to find out the information on the reviewing of m-products by the institution.

There were (17) items tested on a Likert Scale of 1-4; including, 1=Less Extent; 2=Moderate

Extent, 3=Great Extent and 4=Very Great Extent. The results are as shown in Table 4.7.

Table 4.7: Distribution of Respondents on Bank Performance

Statement LE ME GE VGE Total

1. Improve the access to financial services of the Freq 36 21 00 08 65
% 55.4 32.5 00 12.5 100

53
 excluded Kenyans living in Eldoret Town
increasing institutional outreach

2. Increases Profitability and liquidity of the Freq 26 16 13 10 65

Bank % 40 25 20 15 100

3. Achieved financial sustainability and enhanced Freq 32 07 09 07 65

stable financial growth to the Bank % 49 11 14 11 100

4. The bank has good improvement of return on Freq 30 21 07 07 65

equity in the last 12 months % 46 32 11 11 100

5. The bank has good improvement of return on Freq 40 07 10 08 65

assets in the last 12 months % 62 11 16 12 100

6. These factors have enhanced the operational Freq 35 24 06 00 65

and financial sustainability of the institution’s % 54 37 09 00 100
operations

7. The firm has better return on equity than Freq 41 13 11 00 65

industry average % 63 20 17 00 100

8. The firm has better return on assets than Freq 38 20 07 00 65

industry average % 59 31 11 00 100

9. Net income continue to grow and become Freq 28 28 07 02 65

stable % 43 43 11 03 100

10. Total Asset is increasing stronger over Freq 17 17 16 15 65

liabilities % 26 26 25 23 100

11. Return on Assets (ROA)=Net Income after Freq 25 28 12 00 65

tax /Total Asset ratio has continued to cover % 39 43 19 00 100
tax, interest and dividend payments

12. Net income has shown growth over a shilling Freq 14 26 16 09 65

equity invested % 22 40 25 14 100

13. Total Equity continue to grow Freq 30 20 10 05 65

% 46 31 15 08 100
14. Return on Equity (ROE)=Net Income after Freq 25 20 10 10 65
tax /Total Equity indicating an increased % 39 31 15 15 100
earning over a unit of equity invested

15. Increases in sales volume, revenue generated, Freq 32 14 10 09 65

and accounts acquired and enhances % 49 22 15 14 100
performance within agreed expense budgets
and improved customer relationship
satisfaction, and margin achieved

54
16. Increase Reduced Cost of Borrowing, Share of Freq 26 18 11 10 65
Wallet Retention and Drive Loyalty and drives % 40 28 17 15 100
advocacy

17. Increase Productivity, ROC or EVA Efficiency Freq 29 16 10 10 65

% 45 25 15 15 100
GE=Great Extent, ME=Moderate Extent, LE=Less Extent and VGE=Very Great Extent

On the statement that Sampled Commercial Banks experienced improved access to financial

services of the excluded Kenyans living in Eldoret Town increasing institutional outreach; the

respondents who stated Less Extent accounted for 55.4%(36), moderate extent were 33.0%(21)

great extent 0.0%(0) and very great extent were 13.0%(08). This implied that majority

55.4%(36) of the respondents were of the opinion that there was little improved access to

financial services of the excluded Kenyans living in Eldoret Town increasing institutional

outreach to a less extent. This is an indication that commercial banks that were sampled in this

study were not improving access to financial services to majority of Kenyans living in Eldoret

town who were excluded from mainstream commercial banks financial service provisions.

The results in Table 4.7 also show that participants who indicated to a less extent accounted for

40.0%(26); moderate extent were 25.0%(16); great extent 20.0%(13) and very great extent were

15.0%(10) that the sampled commercial banks experienced increased profitability and liquidity.

This infers that majority 40.0%(26) of the respondents were of the opinion that the sampled

banks experienced minimal improved experienced increased profitability and liquidity. This

means that is an indication that the sampled commercial banks were not able to improve on their

profitability and liquidity levels. This could mean lack of cash flow and ability to improve their

ability to convert their current assets into cash when needed especially on paying interest rates or

cost of operations that are mandatory expenditures.

55
It was also indicated in the results in Table 4.7 that respondents who stated to a less extent

accounted for 49.0%(32); moderate extent were 11.0%(07); great extent 14.0%(09) and very

great extent were 11.0%(07) that the sampled banks achieved financial sustainability and

enhanced their stable financial growth. This implied that majority of the respondents were of the

opinion that the surveyed commercial banks were not able to achieve financial sustainability and

enhanced stable financial growth. This infers that the sampled commercial banks lacked financial

stability and sustainability due to lack of financial growth.

The opinion on that the bank has good improvement of return on equity in the last, the results in

Table 4.7 indicated that the respondents’ opinion on less extent accounted for 46.0%(30),

moderate extent 32.0%(21), great extent 11.0%(07), very great extent 11.0%(07). This implies

that majority 46.0%(30) of the respondents are of the opinion that surveyed commercial banks

have little improvement of return on equity in the last 12 months. This means that the returns

generated as a result of equity employed by these commercial banks have not been good over the

last 12 months; an indication that returns on equity could be inadequate or total losses.

In relation to the statement that the bank has good improvement of return on assets in the last 12

months; the opinion of the respondents were less extent 62.0%(40), moderate extent 11.0%(07),

great extent 16.0%(10), very great extent 12.0(08). This implies that majority 62.0%(40) of the

respondents were of the opinion that the sampled commercial banks experience poor

performance in terms of returns on assets employed. This means that there was lack of strong

revenue generated in proportion to the assets employed by these banks. Apart from that; on the

statement that interest rates capping, capital adequacy and cost of operations have enhanced the

56
operational and financial sustainability of the institution’s operations; 54.0%(35) of the

respondents represented to a less extent; 37.0%(24) were of the moderate extent opinion; great

extent were 9.0%(06) while to a very great extent accounted for 0.0%(0) that the sampled

commercial banks experienced enhanced operational and financial sustainability because of the

capping of interest rates, capital adequacy and the cost of operations. This implies that majority

54.0%(35) of the sampled respondents were of the opinion that to a less extent these factors have

enhanced operational and financial sustainability.

The results in Table 4.7 also indicate that on the statement that commercial banks have better

return on equity than industry average, respondents who stated to a less extent accounted

63.0%(41), moderate extent 20.0%(13), great extent 17.0%(11), while very great extent

accounted for 0.0%(0). This implies that majority 63.0%(41) of respondents were of the opinion

that to a less extent commercial banks have better return on equity than industry average;

inferring that these banks were not performing above industry average in terms of returns on

equity employed. Moreover, the results revealed that the respondents who stated to a less extent

accounted for 59.0%(38), moderate extent 31.0%(20), great extent 11.0%(07) and very great

extent 0.0%(0) that the firm has better return on assets than industry average. This implies that

majority 59.0%(38) stated that to a less extent the sampled commercial banks have better return

on assets than industry average. This means that the performance of these commercial banks

were below industry average in terms of returns on assets.

Likewise, the results in Table 4.7 show that respondents who stated less extent accounted for

43.0%(28), moderate extent 43.0%(28), great extent 11.0%(07) and very great extent accounted

57
for 3.0%(02) that net income continue to grow and become stable for among the sampled

commercial banks in Eldoret Town. This implies that majority 43.0%(28) of the respondents

stated both less extent and moderate extent that net income continue to grow and become stable.

This means that the sampled commercial banks, at the time of the survey, experienced little net

income growth from their operations.

Moreover, on the statement that Total Asset is increasing stronger over liabilities, those who

stated less extent accounted for 26.0%(17), moderate extent 26.0%(17), great extent 25.0%(16),

very great extent 23.0%(15). This implies that majority 26.0%(17) of the sampled respondents

were of the opinion that both to a less extent and moderate extent Total Asset is increasing

stronger over liabilities. This infers that to a moderate extent Total Asset of the sampled banks

was increasing stronger over liabilities.

Further on, on the statement that Return on Assets (ROA)=Net Income after tax /Total Asset

ratio has continued to cover tax, interest and dividend payments; respondents who were of the

opinion of less extent accounted for 39.0%(25), moderate extent 43.0%(28), great extent

19.0%(12) while very great extent accounted for 0.0%(0). This is an indication that majority

43.0%(28) of the respondents were felt that Return on Assets (ROA)=Net Income after tax /Total

Asset ratio moderately continued to cover tax, interest and dividend payments. This means that

the sampled commercial banks during the time of survey, showed a state of inadequate ability of

Return on Assets (ROA)=Net Income after tax /Total Asset ratio to continue to cover tax, interest

and dividend payments.

58
At the same time, results on the statement net income has shown growth over a shilling equity

invested show that great extent scored 25.0%(16), moderate extent 40.0%(26), less extent

22.0%(14) and very great extent 14.0%(09). This implies that majority 40.0%(26) of the

respondents stated that to a moderate extent, the net income of the sampled commercial banks

have shown growth over a shilling equity invested. This means that slightly above the minimal

level or just below the average, the growth of net income over a shilling equity invested has been

experienced.

Equally, on the statement that Total Equity continue to grow; respondents who were of the

opinion of less extent accounted for 46.0%(30), moderate extent 31.0%(20), great extent

15.0%(10) while very great extent accounted for 8.0%(5). This is an indication that majority

46.0%(30) of the respondents felt that to a less extent Total Equity continue to grow. This means

that the sampled commercial banks during the time of survey were hardly experiencing growth in

total equity growth.

Also, on the statement that Return on Equity (ROE)=Net Income after tax /Total Equity

indicating an increased earning over a unit of equity invested; the respondents who stated less

extent were 39.0%(25), moderate extent 31.0%(20), great extent 15.0%(10) and very great extent

15.0%(10). This is an indication that majority 39.0%(25) of the respondents were of the opinion

that there were little degree of increased earnings over a unit of equity invested thus after tax

income could remain minimal.

59
The results in Table 4.7 also show that participants were of varied opinion on the statement that

increases in sales volume, revenue generated, and accounts acquired and enhance performance

within agreed expense budgets and improved customer relationship satisfaction, and margin

achieved; those who stated less extent accounted for 49.0%(32), moderate extent 22.0%(14),

great extent 15.0%(10) and very great extent were 14.0%(09). This implies that majority

49.0%(32) of the participants were of the opinion that to a less extent increases in sales volume,

revenue generated, and accounts acquired and enhance performance within agreed expense

budgets and improved customer relationship satisfaction, and margin achieved. This infers that

there is little influence the sales volume achieved and improved customer relationship

satisfaction, and margin achieved.

It was also noted in Table 4.7 that respondents who stated less extent accounted for 40.0%(26),

moderate extent 28.0%(18), great extent 17.0%(11) and very great extent 15.0%(10) on the

statement that the explored factors increase reduced cost of borrowing, share of wallet retention

and drive loyalty and drives advocacy. This implies that majority 40.0%(26) of the respondents

were of the opinion that to a less extent the explored factors increase reduced cost of borrowing,

share of wallet retention and drive loyalty and drives advocacy. This could mean that there is still

high cost of borrowing, reducing the share of wallets retention and little drive to loyalty and

advocacy among the current and potential customers.

Finally, it was also noted that from the results in Table 4.7, respondents whom stated less extent

were 45.0%(29), moderate extent 25.0%(16), great extent 15.0%(10) while very great extent

were 15.0%(10) on the statement that the sampled commercial banks experienced increase

60
productivity, ROC or EVA efficiency. This implies that majority 45.0%(29) of the respondents

stated to a less extent meaning that there was not so much degree of the sampled commercial

banks experienced increase productivity, ROC or EVA efficiency.

The results in Table 4.7 indicted items which measured different areas; thus items numbers 9, 10

and 11 measured commercial banks performance in relations to returns on assets. While the

numbers 12 to 17 measured returns on equity.

4.4 Factors Affecting Performance of Commercial Banks

There were three factors identified in this study as independent variables to explore in finding

out how they affect performance of commercial banks. These include interest rates capping,

capital adequacy and cost of operations. They were independently and jointly investigated to

determine their degree of influences, if any, on the performance of commercial banks. The

results are presented in the sections that follow:

4.4.1 Affordability of Interest rates Before Capping

This section sought to determine whether the interest rates before interest rate capping affordable

to Commercial bank customers. The results were as shown in Figure 4.2.

61
Figure 4.2: Interest Rates before Capping Affordable to Customers

The results in Figure 4.2 indicate that majority (40) of the respondents indicated that the interest

rates before capping was affordable to their customers. Only (25) out of 65 respondents stated

yes that interest rates before capping was affordable to customers. This is above the average level

indicating strong feeling of the respondents against the affordability of interest rates before

capping. It implies that interest rates charged by banks before capping are high to affordability of

many customers. This is in line with the Central bank of Kenya (2018) survey findings Report

that interest rates charged by commercial banks are too high excluding certain group of Kenyans

access to financial services.

4.4.2 Interest Rates Affordability to Customers after Capping

This section sought to find out if the interest rates after interest rate capping affordable was now

affordable to the customers. The results were as shown in Figure 4.3.

62
Figure 4.3: Interest Rates Affordability to Customers after Capping

The results in Figure 4.3 indicate that those who indicated Yes were (45) and No were (20). It

means that majority (45) of the respondents agreed with the statement that interest rates after

capping were affordable to customers. This means that interest rates capping is a tool useful in

reducing interest rates to the level affordable to customers.

4.4.3 Increased Number of Loan Requests after Interest Rates Capping

It was also important for this study to find out the behaviour of loans after interest rates capping

was done given that it had an influence on customer affordability to the interest chargeable on

loans. The results were as shown in Figure 4.4.

63
Figure 4.4: Increased Number of Loan Requests after Interest Rates Capping

The results in Figure 4.4 indicate that those who indicated Yes were 46.0%(30) and No were

54.0%(35). It means that majority 54.0%(35) of the respondents were of the opinion that the

number of loan requests have not increased after interest rates capping. This means that although

interest rates capping helped reduce the cost of borrowing, the commercial banks might have

been hesitant to attract increased number of loan applicants especially, small groups. This was

the position in Kenya immediately after interest rates capping. The commercial banks resorted to

lending to government and other large borrowers.

4.4.4 Commercial Banks Increased Lending After Interest Rates Capping

This section sought to establish whether there was increased lending by commercial banks after

the capping was doe. This was important to establish the details about the thinking that interest

rates capping reduce more borrowing and hence banks may reduce their lending rates. Moreover,

it is believed by banks that the customers they lend to may reduce in number, hence reduced

capability to give out loans. The results are as shown in Table 4.8.

64
Table 4.8: Respondent Opinion on Increased Lending After Interest rates Capping

Frequency Percentage

Yes 55 85.00

No 10 15.00

Total 65 100.00

The results in Table 4.4 indicate that 85.0% (55) respondents stated that the commercial banks

increased lending after interest rate capping while only 15.0% (10) respondents stated that the

commercial banks did not increase lending after the capping of interest rates. This infers that

majority 85.0% (55) of the respondents were of the feeling that there was increased lending by

commercial banks after the interest rates capping was done. However, it is interesting to realise

that the results in Figure 4.4 stated that there were no loan request increases after capping of

interest rates. This could mean a shift of commercial banks to lend to other sources and not the

usual customers including the formerly excluded ones.

4.4.5 Commercial Bank Revenue Increase after Interest Rates Capping

The study further required to establish whether the respondents had a feeling if their

organisations have experienced increased revenue after interest rates capping. The outcomes are

as indicated in Table 4.9.

Table 4.9: Commercial Bank Revenue Increase after Interest Rates Capping

Responses Frequency Percent

Yes 40 61.0
No 25 39.0
Total 65 100

65
The results in Table 4.9 show that majority of the respondents 61.0%(40) agreed that there was

revenue increase after the interest rates capping was effected. Only 39.0%(25) remaining

respondents stated that there was no revenue increase after capping. This implies that although

banks fearfully implemented interest rates capping, their revenue still grew despite the belief that

it might have caused revenue reduction. However, what these findings are revealing is that even

though the cost of interest was affordable after interest rates capping compared to before

capping, this did not enhance increased loan applications or attract new customers but the

revenue continued to grow. This could mean the transfer from the current group of customers to

new types such as the government.

4.4.6 Commercial Bank Considering their Markets

Respondents were asked whether they had considered their markets when setting interest rates

charges. The results are as shown in Table 4.10.

Table 4.10: Respondents on Commercial Bank Considering their Markets

Frequency Percent
No 42 65.0
Yes 23 35.0
Total 65 100.0

The results in Table 4.10 indicate that majority 65.0%(42) of the respondents felt that the

commercial banks did not consider their markets when setting interest rates. The remaining

35.0%(23) of them stated that the banks consider their markets. This is an indication that most

banks charge interest rates that do not consider market affordability. The results also imply that

since the rates charged are not market considerate, there is a possibility that most customers are

excluded from applying for loans due to high interests charged on such loans.

66
4.4.7 Effect of Capping of Interest Rate on Credit Borrowing

This section sought to determine if there is any influence of interest rates capping on the

borrowing behaviour of clients. There were 11 items that measured this influence, which were

subjected to a Likert scale of 1-4 where 1=Disagree; 2=Strongly Disagree; 3 Agree and 4

Strongly Agree (SA=Strongly Agree; A=Agree; SD=Strongly Disagree and D=Disagree) The

results are as shown in Table 4.1.

Table 4.11: Descriptive Statistics on Effect of Interest Rate Capping on Borrowing

Interest Rates Capping Effect SA A SD D MN SD

The bank had many borrowers before the 29(45.0) 13(20.0) 13(20.0) 10(15.0) 3.6 1.2
capping of interest rates
The number of loan borrowers decreased due to 65(40.0) 13(20.0) 13(20.0) 13(20.0) 3.4 0.9
interest rate capping
The number of approved loans has increased 33(50.0) 10(15.0) 16(25.0) 7(10.0) 2.3 0.9
since the law came into effect
The number of new borrowers has increased 33(51.0) 12(19.0) 10(15.0) 10(15.0) 4.3 0.9
since the law came into effect
The requirements for new loans have increased 31(47.0) 22(33.0) 13(20.0) 7(10.0) 3.7 1.0
since the law came into effect
The interest rate capping law has increased the 29(45.0) 20(30.0) 13(20.0) 3(5.0) 3.5 1.0
number of customers accessing credit
More customers are turning to informal lending 31(47.0) 11(16.0) 17(24.0) 9(13.0) 3.3 1.0
since the law came into effect
The bank’s liquidity has improved since the 27(42.0) 19(29.0) 17(26.0) 2(3.0) 2.4 0.9
interest rate cap law came into effect
The bank has slowed down on lending since the 38(58.0) 14(22.0) 12(18.0) 1(2.0) 2.6 0.8
law came into effect
The selection criteria for new loans is now more 27(42.0) 22(33.0) 13(20.0) 3 (5.0) 2.5 0.8
strict since the law came into effect
Interest capping forces banks to have intense 26(40.0) 20(30.0) 13(20.0) 7 (10.0) 2.3 0.9
selection during lending
Overall Average 3.1 0.94
Key - SA=Strongly Agree, A=Agree, SD=Strongly Disagree and D=Disagree, MN=Mean and
SD=Standard Deviation

The results in Table 4.11 indicate that majority indicated their there was strong indication of

influence of interest rates capping on borrowing, a situation that can impact on the long term

67
sustainability of the commercial bank future income generation. When borrowings are affected,

especially reduced, then the source of income from interest charged on loans borrowed or

application fees would fall hence income stability strength level diminish. The mean score value

of 4.3 being the highest and a standard deviation of .9, which less than one implying a moderate

and significant varied response from the mean.

On the statement that the bank had many borrowers before the capping of interest rates was

shown with a slightly moderate mean value of 3.6 and with a less than one of the standard

deviation of 0.8 which implied that there was a significant and moderate varied response from

the mean. On the statement that the number of loan borrowers decreased due to interest rate

capping shown by a moderate mean value of 3.4 and a standard deviation .9 which was

significant and a less response than one from the mean.

On the statement that the number of approved loans has increased since the interest rates capping

law came into effect was indicated by a moderate mean of 2.3 which was significant and a

standard deviation of .9 showing a less than one varied response from the mean. The results also

indicated that on the statement whether the number of new borrowers has increased since the law

came into effect showed a moderate mean score value of 4.9 which was significant and a

standard deviation value of .9 which revealed varied response by the respondents from the mean.

Also it was shown from the results that responses on the statement that the requirements for new

loans have increased since the law came into effect indicated a significant moderate mean score

68
value of 3.7 with a standard deviation of 1.0 which was equal to one varied response from the

mean. Moreover, the results also show the statement that the interest rate capping law has

increased the number of customers accessing credit was significant with moderate mean score

value of 3.5 and with a standard deviation of 1.0 showing a varied response from the mean.

The results in relation to the statement that more customers are turning to informal lending since

the law came into effect showed a moderate mean score value of 3.3 and equal to one standard

deviation of 1.0 with a significant varied response from the mean by the respondents. This was

consistent the study by (Kayunula &Quarley,2000, Muhammed et al 2010, Subhan et al 2013)

that commercial banks in many cases enforce several lending conditions in a loan contract before

granting the loan to their clients. Such conditions included charged interest rates which the

borrower may not have the power to influence. Typically, the value of the interest rate charged

was higher to most clients hence excluding most clients from accessing loans from commercial

banks. At the same time, in relation to the statement that the bank’s liquidity has improved since

the interest rate cap law came into effect showed a moderate mean score value of 2.4 and a

significant varied response of .9 standard deviation from the mean by respondents.

Moreover, on the statement that the bank has slowed down on lending since the law came into

effect, the results revealed a moderate mean score value of 2.6 and a standard deviation of .8

implying a significant varied response from the mean by the respondents. Whether the selection

criteria for new loans is now more strict since the law came into effect, the results revealed a

moderate mean score of 2.5 and a standard deviation of .8 implying a significant varied response

from the mean by the respondents. In addition to that result also revealed a significant and

69
moderate mean score value of 2.33 and a varied standard deviation of .9978 from the mean

indicating a varied response from the mean by the respondents on the statement that interest

capping forces banks to have intense selection during lending.

In summary of the results in Table 4.11, it is revealed that there is an influence of interest

capping law on borrowing of loans by clients. It is revealed that majority at least 40% of

respondents agreed with the statement that interest rates capping before and after had varied

influence on the borrowing behaviours of customers.

4.4.8 Effect of Interest Rate Capping on Bank Profitability

The study also sought to establish if there were any effects of interest rates capping on the

commercial bank profitability. There were 8 items of measure that were subjected to the Likert

Scale of 1-4 on the level of Strongly Agree, Agree, Strongly Disagree and Disagree. The results

are as shown in Table 4.12.

The results in Table 4.12 indicate that majority showed their strong opinion on the interest rates

capping on commercial bank profitability. When borrowings are affected, especially reduced,

then the source of income from interest charged on loans borrowed or application fees would fall

hence income stability strength level diminish. The mean score value of 4.2 being the highest

and a standard deviation of .8 which less than one implying a moderate and significant varied

response from the mean.

Table 4.12: Effect of Interest Rate Capping on Bank Profitability

Interest Rates Capping Effect SA A SD D M SD

N
Interest income has increased since the law 28(43.0) 24(37.0) 7(10.0) 7(10.0) 3.3 1.2

70
came into effect.
Capping of interest rates has led to an increase 26(40.0) 19(29.0) 14(21.0) 7(10.0) 3.8 0.8
in bank profitability
Loan loss provisions have reduced since the law 34(52.0) 13(20.0) 9(14.0) 9(14.0) 2.1 0.8
came into effect
The default rate has increased since the law 33(51.0) 12(19.0) 17(26.0) 3(4.0) 4.2 0.8
came into effect
Other bank charges have increased since the law 31(47.0) 12(19.0) 16(25.0) 6(9.0) 3.8 0.7
came into effect
Interest rate capping has led to reduction in 29(45.0) 11(17.0) 16(25.0) 9(13.0) 3.9 0.7
liquidity/funds available for lending
Capping of interest rates has increased 31(47.0) 11(16.0) 16(24.0) 9(13.0) 3.4 0.9
marketability of the bank
An increase in average loan size and Decreased 27(42.0) 19(29.0) 17(26.0) 2(3.0) 2.2 0.7
diversity of products for low-income households
Overall Average 3.3 0.83
Key - SA=Strongly Agree, A=Agree, SD=Strongly Disagree and D=Disagree, MN=Mean and
SD=Standard Deviation

The results in Table 4.12 showed on the statement that t Interest income has increased since the

law came into effect was shown with a slightly moderate mean value of 3.3 and with a less than

one of the standard deviation of .83 which implied that there was a significant and moderate

varied response from the mean. On the statement that capping of interest rates has led to an

increase in bank profitability shown by a moderate mean value of 3.8 and a standard deviation .8

which was significant and a less response than one from the mean.

The results in Table 4.12, in relation to the statement that Loan loss provisions have reduced

since the law came into effect also showed a moderate mean score value of 2.1 and equal to one

standard deviation of .8 with a significant varied response from the mean by the respondents. At

the same time, in relation to the statement that the default rate has increased since the law came

into effect there was a moderate mean score value of 4.2 and a significant varied response of .8

standard deviation from the mean by respondents. Moreover, on the statement that the Other

bank charges have increased since the law came into effect, the results in Table 4.12 revealed a

moderate mean score value of 3.8 and a standard deviation of .7 implying a significant varied

71
response from the mean by the respondents. Whether the Interest rate capping has led to

reduction in liquidity/funds available for lending, the results revealed a moderate mean score of

3.9 and a standard deviation of .7 implying a significant varied response from the mean by the

respondents.

Further on, the results in Table 4.12 also showed a moderate mean score value of 3.4 and a

significant varied response of .9 standard deviation from the mean by respondents on the

statement that capping of interest rates has increased marketability of the bank. Lastly, in relation

to the statement that an increase in average loan size and decreased diversity of products for low-

income households, the results in Table 4.12 showed a moderate mean score value of 2.2 and a

significant varied response of .7 standard deviation from the mean by respondents.

These results are indicating that there is a strong opinion among respondents that the interest

rates capping has an indirect influence on the commercial bank profitability. This is shown

where all the 8 statements of profitability measure were strongly agreed with that they influence

the profitability outcomes as a result of the statement profitability area. At least all the 8 items

had a strongly agree score of 40.0%, with the highest score being 52.0% on strongly agree.

4.4.8 Effect of Interest Rate Capping on Portfolio of Non-Performing Loans

The study also sought to establish if there was any effect of interest rate capping on portfolio of

non-performing loans. There were 8 items of measure that were subjected to the Likert Scale of

1-4 on the level of Strongly Agree, Agree, Strongly Disagree and Disagree. The results are as

shown in Table 4.13.

72
Table 4.13: Effect of Interest Rate Capping on Portfolio of Non-Performing Loans

Interest Rates Capping Effect SA A SD D M SD

N
The number of non-performing loans has 39(60.0) 10(15.0) 10(15.0) 7(10.0) 3.0 0.8
increased since the law came into effect
There have been increased recoveries on non- 34(52.0) 18(28.0) 13(20.0) 0(0.0) 3.2 0.6
performing loans since the law came into effect
Loan loss provisions have greatly increased 29(44.0) 22(34.0) 14(22.0) 0(0.0) 2.0 0.7
since the rate cap law came into effect
Projects and requests to restructure credit 33(51.0) 13(19.0) 17(26.0) 3(4.0) 4.1 0.7
facilities have increased since the law came into
effect
There has been increased time spent in 31(47.0) 16(25.0) 13(19.0) 6(9.0) 3.1 0.8
managing non-performing loans since the law
came into effect
Interest rate capping has enabled recovery of 29(45.0) 11(17.0) 16(25.0) 9(13.0) 3.2 0.9
non-performing loans
Non-performing loans have slowed the growth 31(47.0) 16(24.0) 10(16.0) 9(13.0) 3.2 0.7
rate of loans in the bank
Non-performing loans hinders the bank`s ability 27(42.0) 19(29.0) 17(26.0) 2(3.0) 2.1 0.6
of making profits.
Overall Average 3.0 0.73
Key - SA=Strongly Agree, A=Agree, SD=Strongly Disagree and D=Disagree; MN=Mean and
SD=Standard Deviation

The results in Table 4.13 indicate that majority showed their strong opinion on the interest rates

capping on commercial bank profitability. When it comes to non-performing loan portfolio as

affected, especially reduced, then the source of income from interest charged on loans borrowed

or application fees would fall hence income stability strength level diminish. The overall mean

score value of 3.0 being the highest and a standard deviation of .73 which less than one implying

a moderate and significant varied response from the mean.

The results in Table 4.13 showed on the statement that the number of non-performing loans has

increased since the law came into effect was shown with a slightly moderate mean value of 3.0

and with a less than one of the standard deviation of .8 which implied that there was a significant

and moderate varied response from the mean. On the statement that there have been increased

recoveries on non-performing loans since the law came into effect shown by a moderate mean

73
value of 3.2 and a standard deviation .6 which was significant and a less response than one from

the mean.

The results in Table 4.13, in relation to the statement that Loan loss provisions have greatly

increased since the rate cap law came into effect, as well showed a moderate mean score value of

2.0 and equal to one standard deviation of .7 with a significant varied response from the mean by

the respondents. At the same time, in relation to the statement that Projects and requests to

restructure credit facilities have increased since the law came into effect, there was a moderate

mean score value of 4.1 and a significant varied response of .7 standard deviation from the mean

by respondents. Moreover, on the statement that the there has been increased time spent in

managing non-performing loans since the law came into effect, the results in Table 4.12 revealed

a moderate mean score value of 3.1 and a standard deviation of .8 implying a significant varied

response from the mean by the respondents. Likewise, considering results on whether the Interest

rate capping has enabled recovery of non-performing loans, the results revealed a moderate mean

score of 3.2 and a standard deviation of .9 implying a significant varied response from the mean

by the respondents.

Further on, the results in Table 4.13 also showed a moderate mean score value of 3.2 and a

significant varied response of .7 standard deviation from the mean by respondents on the

statement that Non-performing loans hinders the bank`s ability of making profits, the results in

Table 4.13 showed a moderate mean score value of 2.1 and a significant varied response of .6

standard deviation from the mean by respondents.

74
In summarizing the results of table 4.13, it showed that majority of respondents strongly agreed

that the interest rates capping influences the portfolio of non-performing loans. This is shown by

all eight (8) statement items of measuring effects on portfolio of non-performing loans were

strongly agreed. This inferred that all the areas within which the items measured is affected

either positive or negatively. At least all the 8 items had a strongly agree score of 40.0%, with

the highest score being 52.0% on strongly agree.

4.4.9 Applicability of Basel II Accord in the Kenyan Commercial Banks

This section sought to find out the reaction of respondents on the applicability of Base II accord.

The results are as shown in Figure 4.5.

Figure 4.5: Applicability of Basel II Accord in the Kenyan Commercial Banks

The results in Figure 4.5 show that majority 61.0%(40) of the respondents indicated that the base

II accord is applicable to all commercial banks in Kenya. The other 31.0%(20) stated that it was

75
applicable to some banks while only 8.0%(5) indicated that this Base II accord was not

applicable to any bank in Kenya. This means that the sampled banks considered this case on

capital adequacy as an important factor for their banking operation, probably for compliancy.

4.4.10 Capital Adequacy Requirement Compliance by Commercial Banks

In order to determine the effects of capital adequacy on commercial bank performance, it was

critical to first determine the degree of compliance the banks could show. The results are as

shown in Table 4.14.

Table 4.14: Capital Adequacy Requirements

Year/Ratio Tier I/TRWA Tier II/TRWA Tier I/Total Deposits

2015 20% 22% 17%
2016 18% 21% 16%
2017 20% 23% 17%
2018 18% 21% 19%
Minimum CAR 08% 12% 08%
Source: CBK Financial Stability Report 2019

The Central Bank of Kenya (CBK) issued new guidelines on prudential capital adequacy ratios

for the commercial banks in Kenya. A capital buffer of 2.5% above the traditional ratios was

introduced and it was made effective from January 2015. Although the commercial banks have

the freedom to choose their levels of capital adequacy, the minimum regulatory capital adequacy

requirement which is 8% for ratio of core capital to total risk weighted assets (Tier I) and 12%

for total capital to total risk weighted assets (Tier II).

From Table 4.14, the ratio of core capital to total deposits increased from 17% in 2017 to 19% in

76
2018. Also the sampled commercial banks showed that retained earnings and additional new

capital because of the increase in the capital base funded this. This implies that the sampled

commercial banks met the minimum main capital base of Ksh.1billion. However, the results

showed that the Tier II ratios and I declined from 20% and 23% in 2017 to 18% and 21% in 2018

respectively. This could be because of the significant increase in total risk weighted assets

(TRWA), which grew by 17.3% and 18.5% respectively during the same period.

4.4.11 Effect of Interest Rate Capping on Portfolio of Non-Performing Loans

This section sought to find out the effects of Capital adequacy on bank performance. Given that

the banks had met the minimum requirements, it was important to find out the reason behind this

compliance that the sampled banks have shown. The results are as shown in Table 4.15.

Table 4.15: Basel III Regulations Effects on Capital Requirement of Commercial Banks

Frequency Percentage

Credit Risk Management 30 16.0

Balance Sheet Structure 20 11.0

Deposit Insurance 40 22.0

Financial Stability 45 24.0

Reduced Vulnerability to Liquidity Shocks 50 27.0

Total 185 100.00

The results in Table 4.15 show that majority of the respondents from the total frequencies

eported (a respondent was allowed to select more than one item) that reduced vulnerability to

liquidity shocks scored 27.0%(50); this was followed by financial stability at 24.0%(45); deposit

insurance 22.0%(40); credit risk management 16.0%(30) and balance sheet structure 11.0%(20).

77
This means that the most critical aspects of Tier III regulations are considered to have effects on

reduced vulnerability to liquidity shocks, financial stability and deposit insurance.

4.4.12 Capital Adequacy Factor and Commercial Bank Performance

The effects of capital adequacy on commercial bank performance were measured. There were 11

items that measured this influence, which were subjected to a Likert scale of 1-4 where

1=Disagree; 2=Strongly Disagree; 3= Agree and 4= Strongly Agree (SA=Strongly Agree;

A=Agree; SD=Strongly Disagree and D=Disagree). The results are as shown in Table 4.16.

Table 4.16: Capital Adequacy Factor and Commercial Bank Performance

Interest Rates Capping Effect SA A SD D MN SD

Give an effective framework to measure, 29(45.0) 13(20.0) 13(20.0) 10(15.0) 3.6 1.2
monitor, and control credit risk
Provide guidance and timely information on 65(40.0) 13(20.0) 13(20.0) 13(20.0) 3.4 0.9
emerging issues and regulatory concerns that
should be incorporated into the loan policy.
Ensures the institution’s general and financial 33(50.0) 10(15.0) 16(25.0) 7(10.0) 2.3 0.9
stability and soundness
Establishes authority, rules and framework to 33(51.0) 12(19.0) 10(15.0) 10(15.0) 4.3 0.9
operate and administer the loan portfolio
effectively
Controls lending risk 31(47.0) 22(33.0) 13(20.0) 7(10.0) 3.7 1.0
Acts as Buffer against loses and security to 29(45.0) 20(30.0) 13(20.0) 3(5.0) 3.5 1.0
depositors
promotes economic growth and resource 31(47.0) 11(16.0) 17(24.0) 9(13.0) 3.3 1.0
distribution across all sectors
it gives a comprehensive financial position of 27(42.0) 19(29.0) 17(26.0) 2(3.0) 2.4 0.9
the bank`s operations
Minimum capital requirement promote a 38(58.0) 14(22.0) 12(18.0) 1(2.0) 2.6 0.8
standardized financial system
Commercial bank profitability 27(42.0) 22(33.0) 13(20.0) 3 (5.0) 2.5 0.8
The effects of unemployment and inflation on 26(40.0) 20(30.0) 13(20.0) 7 (10.0) 2.3 0.9
capital adequacy
Overall Average 3.1 0.84
Key - SA=Strongly Agree, A=Agree, SD=Strongly Disagree and D=Disagree, MN=Mean and
SD=Standard Deviation

The results in Table 4.16 indicate that majority indicated their there was strong indication of

78
influence of interest rates capping on borrowing, a situation that can impact on the long term

sustainability of the commercial bank future income generation. The mean score value of 4.3

being the highest and a standard deviation of .84, which less than one implying a moderate and

significant varied response from the mean.

On the statement that the Give an effective framework to measure, monitor, and control credit

risk showed with a slightly moderate mean value of 3.6 and with a less than one of the standard

deviation of 0.8 which implied that there was a significant and moderate varied response from

the mean. On the statement that Provide guidance and timely information on emerging issues and

regulatory concerns that should be incorporated into the loan policy showed a moderate mean

value of 3.4 and a standard deviation .9, a significant response and a less than one standard

deviation from the mean.

In relation to the statement that ensures the institution’s general and financial stability and

soundness was indicated by a moderate mean of 2.3 which was significant and a standard

deviation of .9 showing a less than one varied response from the mean. The results also indicated

that on the statement that the establishes authority, rules and framework to operate and

administer the loan portfolio effectively showed a moderate mean score value of 4.9 which was

significant and a standard deviation value of .9 revealing a varied response from the mean.

Likewise, it was shown from the results that responses on the statement that controls of lending

risk revealed a significant and a moderate mean score value of 3.7 with a standard deviation of

1.0 which was equal to one varied response from the mean. Also, the results also show the

79
statement that capital adequacy Acts as Buffer against loses and security to depositors was

significant with moderate mean score value of 3.5 and with a standard deviation of 1.0 showing

a varied response from the mean.

The results in relation to the statement that capital adequacy promotes economic growth and

resource distribution across all sectors showed a moderate mean score value of 3.3 and equal to

one standard deviation of 1.0 with a significant varied response from the mean by the

respondents. Further on, the statement that it gives a comprehensive financial position of the

bank`s operations showed a moderate mean score value of 2.4 and a significant varied response

of .9 standard deviation from the mean by respondents.

Moreover, on the statement that Minimum capital requirement promote a standardized financial

system, the results revealed a moderate mean score value of 2.6 and a standard deviation of .8

implying a significant varied response from the mean by the respondents. In addition to that

result also revealed a significant and moderate mean score value of 2.33 and a varied standard

deviation of .9978 on the statement that Commercial bank profitability and the effects of

unemployment and inflation on capital adequacy.

In summary of the results in Table 4.16, it is revealed that there is an influence of capital

adequacy on the level of commercial bank lending level; promotes equal level of competition;

and lending risks among others.

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4.4.13 Importance of Dimensions of Cost of Operations

This section also sought to find out the effects of Cost of Operations on performance of

commercial banks. This is a factor critical to the various aspects of banking operations including

the cost incurred in creating and opening new accounts, management of customer accounts, costs

incurred in processing for new loans, and others. It goes by the saying that the more efficiently

banks are operated, the larger the earnings flows that may improve safety by absorbing losses,

the more efficiently the nation's payments system works and the more efficiently savings are

channeled into investment. The results are as shown in Figure 4.6.

Figure 4.6: Distribution of Importance of Dimensions of Cost of Operations

There were four main elements of the component Cost of Operations which include retail branch

operations, deposit operations, loan operations and entity-wide advice. The results in Figure 4.6

indicate that very great important scored the highest from among all the four elements of cost of

operations. The element of deposit operations scored majority of respondents 55.0%(36)

indicating that it was at the core of influencing banking operations. It was also flowed by both

81
loan operations and retail branch operations at 52.0%(34) each. Then the least in this category

was 49.0%(32) indicating that these four elements were very important in determining efficiency

performances in terms of cost of operations. It infers that the elements of the cost of operations

are all important to the performance of the commercial banks.

4.4.13 Effects of Cost of Operations on Commercial Bank Performance

This section sought to establish if there are any effects of cost of operations on commercial bank

performance. The results are as shown in Table 4.17.

The results in Table 4.17 indicate that majority indicated their there was strong indication of

influence of cost of operations on banks performance, a situation that can impact on the retail

branch operations, deposit operations, loan operations and bank-wide advice operations. The

mean score value of 2.5 being the highest and a standard deviation of .63, which less than one

implying a moderate and significant varied response from the mean. On the statement that the

bank is able to offer lower prices or provide more service subject to economies of scale due to

efficiency in cost of operations showed with a slightly moderate mean value of 3.6 and with a

less than one of the standard deviation of 0.8 which implied that there was a significant and

moderate varied response from the mean. On the statement that cost of operations provide the

banks with the ability to streamline routines at branches, call centers, deposit operations and loan

servicing departments showed a moderate mean value of 3.4 and a standard deviation .9, which

is a significant response with standard deviation value less than one from the mean.

In relation to the statement that banks are able to manage cost of operations and achieve

82
meaningful cost savings and higher productivity while strengthening customer service was

indicated by a moderate mean of 2.3 which was significant and a standard deviation of .9

showing a less than one varied response from the mean. The results also indicated that on the

statement that evaluation and closing low-performing offices to reduce cost of operations hence

boosting productivity of the banks showed a moderate mean score value of 4.9 which was

significant and a standard deviation value of .9 revealing a varied response from the mean.

Likewise, it was shown from the results that responses on the statement that reconfigure roles,

duties and staff within physical branches by combining teller and platform roles to increase

operating flexibility revealed a significant and a moderate mean score value of 3.7 with a

standard deviation of 1.0 which was equal to one varied response from the mean. Also, the

results also show the statement that my bank send general inbound calls to a call center allowing

branch personnel to focus on walk-ins, existing customers who have direct dial numbers and

outbound call programs was significant with moderate mean score value of 3.5 and with a

standard deviation of 1.0 showing a varied response from the mean.

The results in relation to the statement that we have automated new deposit account opening,

wire transfer processing, direct from the retail banking system to the wire processing system

showed a moderate mean score value of 3.3 and equal to one standard deviation of 1.0 with a

significant varied response from the mean by the respondents. Further on, the statement that

Services automation has enhance staff productivity, freeing up branch staff to make outbound

calls and improve the face-to-face experience with walk-in customers showed a moderate mean

score value of 2.4 and a significant varied response of .9 standard deviation from the mean by

83
respondents.

Table 4.17: Effects of Cost of Operations on Commercial Bank Performance

Interest Rates Capping Effect SA A SD D MN SD

The Bank is able to offer lower prices or provide 29(45.0) 13(20.0) 13(20.0) 10(15.0) 3.6 1.2
more service subject to economies of scale due
to efficiency in cost of operations
Ability to streamline routines at branches, call 65(40.0) 13(20.0) 13(20.0) 13(20.0) 3.4 0.9
centers, deposit operations and loan servicing
departments
Able to manage cost of operations and achieve 33(50.0) 10(15.0) 16(25.0) 7(10.0) 2.3 0.9
meaningful cost savings and higher productivity
while strengthening customer service
Evaluation and closing low-performing offices 33(51.0) 12(19.0) 10(15.0) 10(15.0) 4.3 0.9
to reduce cost of operation hence boosting
productivity
Reconfigure roles, duties and staff within 31(47.0) 22(33.0) 13(20.0) 7(10.0) 3.7 1.0
physical branches by combining teller and
platform roles to increase operating flexibility
My bank send general inbound calls to a call 29(45.0) 20(30.0) 13(20.0) 3(5.0) 3.5 1.0
center allowing branch personnel to focus on
walk-ins, existing customers who have direct
dial numbers and outbound call programs
We have automated new deposit account 31(47.0) 11(16.0) 17(24.0) 9(13.0) 3.3 1.0
opening, wire transfer processing, direct from
the retail banking system to the wire processing
system
Services automation has enhance staff 27(42.0) 19(29.0) 17(26.0) 2(3.0) 2.4 0.9
productivity, freeing up branch staff to make
outbound calls and improve the face-to-face
experience with walk-in customers
Free staff operation by using an automated 38(58.0) 14(22.0) 12(18.0) 1(2.0) 2.6 0.8
overdraft system with pre-established criteria to
pay or return specific items and also routing
inbound calls to a call center to lessen
interruptions for back-office operational
routines and relying on staff for case-by-case
review and decision making
Authorize retail or call center staff to perform 27(42.0) 22(33.0) 13(20.0) 3 (5.0) 2.5 0.8
transactions and maintenance without filling out
forms (automated) to send to operations for
review; matching of general ledger activity to
activity in the core that is time saver in account
reconciliations
Automating the booking of new loans to the 26(40.0) 20(30.0) 13(20.0) 7 (10.0) 2.3 0.9
core system to reduce the cost of loan operations
Fully electronic for new loan documentation 31(47.0) 16(25.0) 13(19.0) 6(9.0) 3.1 0.8
during origination, eliminating the need for
handling paper loan documentation upon
transfer of the closed loan to servicing
Separating commercial loan operations from 29(45.0) 11(17.0) 16(25.0) 9(13.0) 3.2 0.9
mortgage and consumer loan operations, and
aligning commercial loan operations with the

84
commercial loan administration resources is
important in improving productivity
Tracking workloads monthly, by full-time 31(47.0) 16(24.0) 10(16.0) 9(13.0) 3.2 0.7
employee or department, and continuously
monitor employee productivity trends is
important in managing costs and improving
revenue generations
The financial services industry can expect 27(42.0) 19(29.0) 17(26.0) 2(3.0) 2.1 0.6
change to continue. Organizations that can
streamline their operations are more likely to
have the agility needed to adjust and maintain
profitability and invest in new operating
requirements as necessary
Overall Average 3.1 0.84
Key - SA=Strongly Agree, A=Agree, SD=Strongly Disagree and D=Disagree, MN=Mean and
SD=Standard Deviation

Moreover, on the statement that management can free staff operation by using an automated

overdraft system with pre-established criteria to pay or return specific items and also routing

inbound calls to a call center to lessen interruptions for back-office operational routines and

relying on staff for case-by-case review and decision making, the results revealed a moderate

mean score value of 2.6 and a standard deviation of .8 implying a significant varied response

from the mean by the respondents. Further on, the results in Table 4.17 also revealed a

significant and moderate mean score value of 2.33 and a varied standard deviation of .9978 on

the statement that banks can authorize retail or call center staff to perform transactions and

maintenance without filling out forms (automated) to send to operations for review; matching of

general ledger activity to activity in the core that is time saver in account reconciliations.

Moreover, on the statement that automating the booking of new loans to the core system to

reduce the cost of loan operations, the results in Table 4.17 revealed a moderate mean score

value of 3.1 and a standard deviation of .8 implying a significant varied response from the mean

by the respondents. Likewise, considering results on whether fully making electronic for new

85
loan documentation during origination, eliminating the need for handling paper loan

documentation upon transfer of the closed loan to servicing, the results revealed a moderate

mean score of 3.2 and a standard deviation of .9 implying a significant varied response from the

mean by the respondents.

Further on, the results in Table 4.17 also showed a moderate mean score value of 3.2 and a

significant varied response of .7 standard deviation from the mean by respondents on the

statement that separating commercial loan operations from mortgage and consumer loan

operations, and aligning commercial loan operations with the commercial loan administration

resources is important in improving productivity, the results in Table 4.17 showed a moderate

mean score value of 2.1 and a significant varied response of .6 standard deviation from the mean

by respondents on the statement that tracking workloads monthly, by full-time employee or

department, and continuously monitor employee productivity trends is important in managing

costs and improving revenue generations and the financial services industry can expect change to

continue and banks that can streamline their operations are more likely to have the agility needed

to adjust and maintain profitability and invest in new operating requirements as necessary.

In summary of the results in Table 4.17, it is revealed that there is an influence of cost of

operations on the level of commercial bank performance. The commercial banks can expect

change to continue. Where they can streamline their operations, then they are more likely to have

the agility needed to adjust and maintain profitability and invest in new operating requirements

as necessary. Banks have the responsibility to improve their operational efficiency, enhanced by

transformation from technologies, embedded behaviours and management attention. The most

86
meaningful opportunities for banks to boost their operational efficiency can be achieved by

streamlining routines that cross multiple departments, particularly branches, call centers, deposit

operations and loan servicing departments. It means that when banks examine cross-functional

opportunities, management can achieve meaningful cost savings and higher productivity while

strengthening customer service.

CHAPTER FIVE

DISCUSSIONS OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.0 Introduction

This chapter presents discussions of findings, conclusions of key findings and recommendations.

There were three research objectives pursued providing results that generated the findings from

which conclusions and recommendations were deduced. This was necessary in pursuing the

factors affecting the performance of commercial banks in Eldoret Town. The target population

consisted of all the sampled commercial banks operating in Eldoret Town. The project also made

inference of the three objectives.

5.1 Discussions of Findings

There were three independent variables that include interest rates capping, capital adequacy and

cost of operations and one dependent variable, commercial bank performance whose three

87
dimensions include Return on Capital-ROC, Returns on Assets-ROA and Return on Equity-

ROE. After performing data collection and application of valid tests the results showed

significantly moderate effects of the three factors on performance.

Generally, the findings showed that the commercial bank performances are facing varied

challenges due to different conditions. At the same time the three factors pursued all indicated to

have varied effects on the banks performances. The study also found out that demographic

findings indicted that response rate was 92.8%(65); it was also found out that both male and

female were involved in the commercial bank and financial service delivery with female group

accounting for majority 60.0% (39) of the participants, this finding was an indication that female

forms majority of the voice in banking service decision making; majority 44.0% (29) of the

sampled respondents aged in the bracket 25-34 years; as for education matters, it was found out

that majority 35.3% (23) of the respondents had Diploma level of education; as for the

managerial positions held, it was found out that majority 55.4% (36) of the respondents were at

operational level, it was also found out that majority 36.8%(24) of the respondents have been to

their current positions for 4-6 years.

The findings on profitability measures, all the three dimensions were found to experience

problems before, during and after interest rates capping law was effected. the highest reported

dimension as critical to commercial bank performance return on equity 84.0%(55), followed by

return on capital 80.0%(52), then return on assets 70.0%(46). It is a finding that indicates that in

order to generate more revenue income that cover all the operating and business expenses, then

commercial banks must improve their performances. The Profitability of Commercial Bank

88
under study was the focus of this study; this was based on the Returns on Assets-ROA, Return on

Equity-ROE and Return on Capital-ROC. All these dimensions were found to have varied level

of performances when subjected to different situations.

The objective one was to find out the effects of interest rates capping on the performance of

commercial banks in Eldoret Town of Uasin Gishu County, in Kenya. It was found out that the

different areas where interest rates capping influence performance include interest rates

affordability, number of loan requests, commercial banks lending changes, commercial bank

revenue increase changes, commercial bank considering their markets, credit borrowing, bank

profitability and portfolio of non-performing loans. The findings indicated that the interest rates

chargeable was not affordable to customers before capping, majority 62.0%(40) of respondents

stated No that it was not affordable; the was found to change when capping was introduced,

majority 69.0%(45) stated yes that the interest rates charged to customers was then affordable

after capping was effected; however it was found out that majority 54.0%(35) of the respondents

were of the opinion that the number of loan requests have not increased after interest rates

capping. This could be due to the switching of clientele by commercial banks, which is beyond

this study; t was also found out that majority 85.0% (55) of the respondents were of the opinion

that there was increased lending by commercial banks after the interest rates capping was done.

The finding also showed that majority of the respondents 61.0%(40) agreed that there was

revenue increase after the interest rates capping was effected. Further on, the findings indicated

that majority 65.0%(42) of the respondents felt that the commercial banks did not consider their

markets when setting interest rates.

89
While interest rates capping is found to have influence, it was surprising to have varied findings

including; expensive unaffordable interest rates charged to customers before capping meaning

before affordability these customers were excluded from the mainstream financial institutions;

when the interest rates capping is effected, the interest rates charged become affordable to clients

but surprisingly the borrowing declines, but commercial banks lending increases with increase in

their revenue too. The source to this increased lending and revenue increase yet loan applications

did not increase is a concern. Moreover, it was found out that more customers turned into formal

lending institutions after the interest rates capping came into effect, an indication that the

mainstream financial institutions might have denied them inclusivity.

The second objective was to assess the effects Capital Adequacy on the performance of

commercial banks in Eldoret Town of Uasin Gishu County, in Kenya. The that majority

61.0%(40) of the respondents indicated that the base II accord is applicable to all commercial

banks in Kenya. It was also found out from Table 4.14, which the ratio of core capital to total

deposits increased from 17% in 2017 to 19% in 2018. Also the sampled commercial banks

showed that retained earnings and additional new capital because of the increase in the capital

base funded this. This implies that the sampled commercial banks met the minimum main capital

base of Ksh.1billion. However, the results showed that the Tier II ratios and I declined from 20%

and 23% in 2017 to 18% and 21% in 2018 respectively. This could be because of the significant

increase in total risk weighted assets (TRWA), which grew by 17.3% and 18.5% respectively

during the same period.

90
The findings also indicated that majority of the respondents from the total frequencies reported (a

respondent was allowed to select more than one item) that reduced vulnerability to liquidity

shocks scored 27.0%(50); this was followed by financial stability at 24.0%(45); deposit

insurance 22.0%(40); credit risk management 16.0%(30) and balance sheet structure 11.0%(20).

This means that the most critical aspects of Tier III regulations are considered to have effects on

reduced vulnerability to liquidity shocks, financial stability and deposit insurance. The findings

indicated in Table 4.16, that there is an influence of capital adequacy on the level of commercial

bank lending level; promotes equal level of competition; and lending risks among others.

The third objective to determine how the Costs of Operations affects the performance of

commercial banks in Eldoret Town of Uasin Gishu County, in Kenya. The findings showed that

very great important scored the highest from among all the four elements of cost of operations.

The element of deposit operations scored majority of respondents 55.0%(36) indicating that it

was at the core of influencing banking operations. It was also flowed by both loan operations and

retail branch operations at 52.0%(34) each.

It was also found out that commercial banks can expect change to continue. Where they can

streamline their operations, then they are more likely to have the agility needed to adjust and

maintain profitability and invest in new operating requirements as necessary. Banks have the

responsibility to improve their operational efficiency, enhanced by transformation from

technologies, embedded behaviours and management attention. The most meaningful

91
opportunities for banks to boost their operational efficiency can be achieved by streamlining

routines that cross multiple departments, particularly branches, call centers, deposit operations

and loan servicing departments. It means that when banks examine cross-functional

opportunities, management can achieve meaningful cost savings and higher productivity while

strengthening customer service.

5.2 Conclusions

This study investigated the factors affecting performance of commercial banks in Eldoret Town.

There were three factors investigated including interest rates capping, capital adequacy and cost

of operations. From the discussions of findings above, the study made various conclusions

including that both male and female were involved in the commercial bank activities with female

group accounting for majority 60.0% (39) of the participants. This could indicate the growing

number of female in the financial industry which was originally dominated by male colleagues.

The study also concluded that the respondents sampled in this study were aged from 25-34,

which is the prime age bracket for potential participation in socioeconomic contribution and

participation.

In order to achieve the objective one, the findings enabled a conclusion to be made that interest

rates capping provide an environment for the regulation for affordability of interest rate charges

to clients this should influence loan borrowings to increase, new loan applications to be received,

increase bank landings and enhance revenue or income improvements.

92
But it was concluded that interest rates capping had effects on the declining of the number of

borrowers; decrease in the number of loan borrowers; increased number of approved loans,

increased number of new borrowers, increase in the requirements for new loans; increased

number of customers accessing credit. It was also concluded that certain group of customers

have turned to informal lending institutions, improved bank; slowed down lending; more strict

selection criteria of new loans and forced intense selection during lending. These are the main

areas where interest rates capping have effects on commercial bank performances.

It was also concluded based on the findings that other areas where interest rates capping

influenced included profitability. The conclusions made included that from the findings that

there was increased interest income; increased in bank profitability; Loan loss provisions have

reduced; increased default rates (non performing loans); increased other bank charges; reduced

liquidity/funds available for lending; increased marketability of the bank and increased average

loan size with decreased diversity of products for low-income households.

In relations to the findings on non-performing loans, it was concluded that there was increased

number of non-performing loans; there was increased recoveries on non-performing loans; great

increase in loan loss provisions; increased projects and requests to restructure credit facilities;

also there has been increased time spent in managing non-performing loans; Interest rate capping

has enabled recovery of non-performing loans. The findings enabled the study to conclude that

non-performing loans have slowed the growth rate of loans in the bank and that non-performing

loans hinders the bank`s ability of making profits.

93
The objective two stated that to assess the effects Capital Adequacy on the performance of

commercial banks in Eldoret Town of Uasin Gishu County, in Kenya. The findings enabled a

conclusion that capital adequacy tiers I, II, and III were all applicable to commercial banks. This

was because the banks needed to be compliant to these regulations. It was also found out that

banks were all compliant having their ratios of core capital to total deposits increased from 17%

in 2017 to 19% in 2018. The findings showed that retained earnings and additional new capital;

it was thus concluded that there was increased capital base critical in funding this increased

earnings. It was in order to conclude that reduced vulnerability to liquidity shocks and financial

stability were mainly critical to the effectiveness of capital adequacy.

Capital adequacy provides an effective framework to measure, monitor, and control credit risk;

give guidance and timely information on emerging issues and regulatory concerns that should be

incorporated into the loan policy; ensures that the bank’s general and financial stability and

soundness; establishes authority, rules and framework to operate and administer the loan

portfolio effectively; controls lending risk; and acts as buffer against loses and security to

depositors. It was also concluded that the capital adequacy promotes economic growth and

resource distribution across all sectors; gives a comprehensive financial position of the bank`s

operations; promote a standardized financial system; enhances bank’s profitability and influences

unemployment and inflation

The third objective was to determine how the Costs of Operations affects the performance of

commercial banks in Eldoret Town of Uasin Gishu County, in Kenya. From the findings, it was

concluded that there were very important aspects of costs of operations that included bank-wide

94
advice, loan operations, deposit operations and retail branch operations. From the findings, it was

indicated that banks can benefits from economies of scale, so it was concluded that cost of

operation was important element for banks in pursuing efficiency in economies of scale in

various areas such as bank-wide advice, loan operations, deposit operations and retail branch

operations.

5.3 Recommendations

From the conclusions above, the study made the following recommendations:

Since it is concluded that commercial banks performances are influenced by interest rates

capping, therefore this study recommends that banks should consider interest rates capping as a

tool to moderate the affordability of loans thus borrowing scale to increase, new loan application

to increase; this would ensure that commercial bank efficiency improves to be able to

prudentially generate revenue and earn profit margin large enough to cover the operating

expenses. This will see performance of commercial banks would improves in areas such as

increased lending and lending scale, increased revenue generations and thereby improving on

profitability. As long as the banks remain efficient, they will earn their profits; which is against

the belief that when commercial banks charge higher non-affordable interest rates on loans is

when they earn profits. Efficiency should provide healthy competitions from which profits be

earned by all hard working commercial banks.

It was also concluded that capital adequacy factor was having an influence on commercial bank

performances. The study also recommends the need to pursue policies that will enable banks to

remain compliant in this areas thus do not create panic among the public as to the future of

95
banking sector since the recent happenings where banks had withdrawn almost all the capital

reserves from central bank subjecting depositors to big losses some of which have not been

recovered. At the same time, the recommendation is made to ensure that the basic areas of capital

adequacy such as credit risk management, balance sheet structure, deposit insurance, financial

stability and reduced vulnerability to liquidity shocks are well managed to improve the

profitability of the commercial banks.

In the final findings and conclusion that cost of operations had influence in the areas of retail

branch operations, deposit operations, loan operations and bank-wide advice. These have ability

to achieve economies of scale thus minimising the costs of operation and improving on

profitability of the commercial banks. It is therefore recommended that cost of operations to be

made relevant in management aspects of commercial bank operations to enhance profitability

improvements.

5.4 Suggestion for Further Studies

The findings and conclusions as well as recommendations limitations that emerged are in the

areas to which these factors, although influencing commercial bank performances, the degree to

which these factors cause this performance is missing. Therefore further study is needed to

determine any causative effects of the studied factors on commercial bank performances in

Kenya as a whole. An entire financial sector and banking industry needs to be considered.

96
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