The financial performance of commercial banks remains a subject of considerable interest in both academic and policy circles, particularly in emerging markets where the banking sector constitutes a critical pillar of economic intermediation. This study examines the determinants of financial performance among Tier II and Tier III commercial banks in Kenya, using data extracted from audited financial statements for the fiscal year ending December 2025. The study employs Return on Assets (ROA) as the dependent variable and considers five bank specific explanatory variables: the Non-Performing Loan (NPL) ratio, Loan to Deposit ratio, Capital Adequacy ratio, Net Interest Income to Assets ratio and Operating Income to Assets ratio. Using Ordinary Least Squares (OLS) regression analysis on a sample of 28 banks, the study finds that the model explains approximately 70.83% of the variation in ROA (R² = 0.7083; Adj. R² = 0.6419), which is statistically significant at the 1% level (F (5, 22) = 10.68; p < .0001). The NPL ratio exerts a significant negative effect on performance (β = −0.0408; p = 0.006), while capital adequacy (β = 0.0913; p = 0.026) and operating income efficiency (β = 0.4214; p = 0.012) are significant positive drivers of ROA. The Loan to Deposit ratio and Net Interest Income ratio do not yield statistically significant effects. Diagnostic tests confirm the absence of multicollinearity (Mean VIF = 1.74), homoskedasticity (Breusch-Pagan p = 0.3153) and correct model specification (Ramsey RESET p = 0.8894). The findings suggest that beyond bank size, credit quality management, capital strength and income diversification are the primary levers of financial performance in Kenya's mid-tier banking segment.
Keywords: Financial performance, ROA, Tier II and III banks, NPL ratio, capital adequacy, OLS regression.
Yegon Kiprotich Festus, Charles Githira· African Development Finance...· 0 citations
This study examines the bank specific and macroeconomic determinants of commercial bank profitability in Kenya using a balanced panel of eleven leading banks observed annually over the ten year period from 2014 to 2023, yielding 110 bank year observations. Profitability is proxied by the return on assets, while the explanatory variables comprise bank size, capital adequacy, liquidity, asset quality measured by the non performing loans ratio, operational efficiency measured by the cost to income ratio, the loan to deposit ratio and two macroeconomic controls, namely real gross domestic product growth and inflation. Three competing estimators were applied: pooled ordinary least squares, a one way fixed effects model and a random effects model. Specification testing through the redundant fixed effects F test rejected the pooled specification in favour of a panel structure, while the Hausman test could not reject the orthogonality of the individual effects, indicating that the random effects estimator is both consistent and efficient for these data. The random effects results show that asset quality, operational efficiency and liquidity exert statistically significant negative effects on profitability, whereas bank size and the rate of economic growth exert significant positive effects. Capital adequacy, the loan to deposit ratio and inflation are not statistically significant once unobserved heterogeneity is accounted for. The non performing loans ratio emerges as the single most influential variable, underscoring the centrality of credit risk management to bank earnings in the Kenyan market. The findings carry direct implications for bank managers seeking to protect margins and for the regulator in calibrating prudential expectations.
Yegon Kiprotich Festus· International journal of res...· 0 citations
