Macroeconomic variables and financial performance of commercial banks in Kenya

Kenya's banking sector demonstrated resilience in 2021, with capital adequacy ratios over 14.5% and liquidity ratios above 20%. Despite a slight decline in food inflation and deposit rates, banks maintained stable performance, achieving a return on assets of about 1.5%. In this study, macroeconomic factors were examined to determine how they affect Kenyan commercial banks' financial performance, which facilitate international money transfers and connect savers with borrowers and are critical for economic growth. However, the sector faces significant financial challenges that have adversely affected the country's overall economic performance, worsened by global and domestic financial issues. Using firm size as a moderator, this study examined the impact of key macroeconomic factors such as inflation, interest rates, money supply, and currency exchange rates on commercial banks' financial performance in Kenya. Theories of interest, balance of payments, classical interest, deflation, organization, and quantity theory of money informed the research. An explanatory research design was adopted, focusing on all 42 commercial banks operating in Kenya. A comprehensive survey was conducted across these banks, utilizing existing data sourced from official audited financial statements over the past six fiscal years, from 2018 to 2023. Statistical measures such as mean, standard deviation, and multiple regression and correlation analysis were assessed by using descriptive statistics. Diagnostic statistics, including autocorrelation, homoscedasticity, multicollinearity, and normality tests were also employed. Ethical considerations were upheld by obtaining informed consent from all participants and properly referencing all materials and sources used. The study revealed that inflation, exchange rate, interest rate and money supply had a positive and significant effect on the financial performance of commercial banks in Kenya. The research finds that inflation generally results in elevated interest rates as central banks strive to manage rising prices, leading to greater interest earnings from loans due to their ability to impose higher rates. Commercial banks frequently participate in foreign currency dealings, encompassing loans, deposits, and trading activities. The research suggests that commercial banks ought to adopt several strategies like modifying interest rates for sustained profitability, diversifying investment portfolios to reduce risks, and prioritizing cost management to enhance operational efficiency.