Analysis of financial structure on financial performance of tier one commercial banks in Kenya

Abstract

In Kenya, the financial performance of commercial banks has been inconsistent, with some recording increasing profits while others have recorded decreasing profits.The general objective of this research is to analyse the effect of financial structure on financial performance of Tier one commercial banks in Kenya. This research was guided by four objectives which were to examine the effect of retained profits on the financial performance of Tier one commercial banks in Kenya, to assess the effect of short-term debt on the financial performance of Tier one commercial banks in Kenya, to investigate the effect of long-term debt on the financial performance of Tier one commercial banks in Kenya and finally to assess the effect of share capital on the financial performance of Tier one commercial banks in Kenya. Descriptive study design was used towards those tier one commercial banks where secondary data was collected using their annual financial reports from 2018 to 2022, and data to be represented in tables and analysed using SPSS software. Mean standard deviation and ANOVA was utilized for descriptive statistics and inferential statistics. To measure financial performance, several different ratios were utilised, inclusive of return on equity, return on assets, and net interest ratio, and so on. The study purports to sought ethical clearance from Mount Kenya University Ethical Review Committee (MKUERC) and NACOSTI. Results displayed the correlation between the effects of financial structure on a Bank’s performance. The ANOVA (Analysis of Variance) evaluated the significance of the regression model. The F-statistic of 6.003, with a significance value of 0.018, indicates that the model as a whole is statistically significant at the 5% level. This means that at least one of the independent variables significantly affects financial performance. The regression analysis shows the coefficients (β values) for each bank in relation to the predictors. The regression analysis indicates that each of the independent variables has a positive effect on the financial performance of Tier One commercial banks in Kenya. Specifically, a one-unit increase in retained earnings (X1) is expected to increase financial performance by 0.234 units (p value<0.05), suggesting that retained earnings play a role in improving the banks' financial outcomes. Similarly, a one-unit increase in short-term debt (X2) is anticipated to lead to a 0.286 (p value<0.05)unit increase in financial performance, highlighting the positive influence of short-term debt on performance. Long-term debt (X3) has the most significant impact, with a unit increase in long-term debt expected to boost financial performance by 0.375 (p value<0.05)units. Finally, share capital (X4) is also positively associated with financial performance, with a one-unit increase expected to result in a 0.314 (p value<0.05)unit increase in performance. These findings underscore the importance of each of these financial factors in enhancing the overall performance of the banks, with long-term debt showing the strongest relationship. Banks should focus on efficient management of long-term debt to maximize its positive impact on financial performance. Regular assessments of borrowing strategies and investments can help mitigate risks associated with high borrowing costs and inefficient debt usage.