Effect of Macroeconomic Factors on Commercial Banks Profitability in Kenya: Case of Equity Bank Limited

Transcription

1 Effec of Macroeconomic Facors on Commercial Banks Profiabiliy in Kenya: Case of Equiy Bank Limied Evans Ovamba Kiganda School of Economics, Maseno Universiy, Kenya and Credi Officer, Equiy Bank Ld, Kenya, P.O. Box , Maragoli, Kenya * of he corresponding auhor: Absrac Commercial banks appear very profiable in Sub-Saharan Africa (SSA), average reurns on asses were abou 2 percen over he las 10 years, significanly higher han bank reurns in oher pars of he world. In order o survive in he long run, i is imporan for a bank o find ou wha are he deerminans of profiabiliy so ha i can ake iniiaives o increase is profiabiliy. However, owing o he fac ha here are few sudies on he deerminans of bank profiabiliy, various sudies indicae divergen views on he effec of macroeconomic facors on bank profiabiliy. For hese reasons, i is no clear wheher or no macroeconomic facors affec bank profiabiliy in Kenya. The main purpose of his sudy was o esablish effec of macroeconomic facors on bank profiabiliy in Kenya wih Equiy bank in focus o undersand counry and bank specific characerisics. Specific objecives were o deermine, examine and evaluae effec of; economic growh (real GDP), inflaion and exchange rae on bank profiabiliy in Kenya wih Equiy bank in focus respecively. This sudy was modeled on he heory of producion and based on correlaion research design. Sample size consised annual daa spanning 5 years from Daa was obained from he World Developmen Indicaors, published Equiy bank documens (annual repors, invesor briefings and financial saemens). To accomplish his ask he sudy used Cobb-Douglas producion funcion ransformed ino naural logarihm. This sudy employed OLS o esablish he relaionship beween macroeconomic facors and bank profiabiliy. The resuls indicaed ha macroeconomic facors (real GDP, inflaion and exchange rae) have insignifican effec on bank profiabiliy in Kenya wih Equiy bank in focus a 5% level of significance. We concluded ha macroeconomic facors do no affec bank profiabiliy in Kenya. In view of his, i is clear ha inernal facors which relae o bank managemen significanly deermine bank profiabiliy in Kenya. The sudy herefore recommends ha banks o adop policies ha enhance managerial efficiency for higher profis o be realized. Keywords: Macroeconomic facors, Commercial bank Profiabiliy 1. Inroducion Commercial banks play a vial role in he economic resource allocaion of counries (Ongore, 2013). They conribue o economic growh of he counry by making funds available for invesors o borrow as well as financial deepening in he counry (Ouori, 2013). Commercial banks appear very profiable in Sub-Saharan Africa (SSA), average reurns on asses were abou 2 percen over he las 10 years, significanly higher han bank reurns in oher pars of he world (Flemini e al., 2009). The major reasons behind high reurn in he region as oulined by Ongore (2013) were; invesmen in risky venures and he exisence of huge gap beween he demand for bank service and he supply hereof. Tha means, in SSA he number of banks are few compared o he demand for he services; as a resul here is less compeiion and banks charge high ineres raes especially rue in Eas Africa where he few governmen owned banks ake he lion's share of he marke (Ongore, 2013). This sudy on he effec of macroeconomic facors on commercial bank profiabiliy in Kenya wih Equiy bank in focus is modeled on he heory of producion. According o Kousoyianis (2003), a producion process is a combinaion of facor inpus required for he producion of one uni of oupu. A commodiy may be produced by various mehods of producion. The producion process as Kousoyianis (2003) pus encompasses a producion funcion which represens a echnical relaion connecing facor inpus and oupus wih sudy employing Cobb Douglas producion funcion. The performance of commercial banks can be affeced by inernal and exernal facors which can be classified ino bank specific (inernal) and macroeconomic variables (Ongore, 2013). The inernal facors are individual bank characerisics which affec he bank's performance, hese facors are basically influenced by he inernal decisions of managemen and board. The exernal facors are secor wide or counry wide facors which are beyond he conrol of he company and affec he profiabiliy of banks (Ongore, 2013). This sudy focused on he effec of macroeconomic facors on he profiabiliy of commercial banks in Kenya which are beyond he conrol of he banks. In order o survive in he long run, i is imporan for a bank o find ou wha are he deerminans of profiabiliy so ha i can ake iniiaives o increase is profiabiliy by managing he dominan deerminans (Podder, 2012). Bank performance is also vially imporan for all sake holders, such as he owners, he invesors, he debors, he crediors, he deposiors, he managers of banks, he regulaors and he governmen (Podder, 2012). The performance of banks gives direcions o he sake holders in 46

2 heir decision making. As oulined by Podder, (2012); I gives direcion o he debors and he invesors o make decision wheher hey should inves money in bank or inves somewhere else, I also flashes direcion o bank managers wheher o improve is finance and Regulaory agencies and governmen are also ineresed in financial performance for he regulaion purposes (Podder, 2012). The purpose of his sudy was o esablish he effec of macroeconomic variables on bank profiabiliy in Kenya wih Equiy bank in focus. This is jusified on he grounds ha here are few sudies on he effec of macroeconomic variables on bank profiabiliy in Kenya. Available sudies are based on panel daa se which gives a general overview raher han focusing on a specific bank. Furher, various sudies lack consensus on he effec of macroeconomic facors on bank profiabiliy. For insance, Ongore (2013) argue ha macroeconomic variables insignificanly affec bank profiabiliy whereas Ahanasoglou e al.,(2006) found mixed resuls wih regard o macroeconomic variables. For hese reasons, i is difficul o conclude wheher or no macroeconomic facors affec bank profiabiliy in Kenya. This sudy herefore, seeks o bridge he inconclusive gap on he effec of macroeconomic variables on bank profiabiliy and he mehodological gap of generalizaion by esablishing he effec of macroeconomic facors on bank profiabiliy in Kenya wih Equiy bank in focus. 1.1 Overview of Banking Secor in Kenya The Companies Ac, he Banking Ac, he Cenral Bank of Kenya Ac and he various prudenial guidelines issued by he Cenral Bank of Kenya (CBK), governs he Banking indusry in Kenya. The banking secor was liberalized in 1995 and exchange conrols lifed (Ouori, 2013). The CBK, which falls under he Naional reasury cabine secreary s docke, is responsible for formulaing and implemening moneary policy and fosering he liquidiy, solvency and proper funcioning of he financial sysem (Ouori, 2013). The CBK publishes informaion on Kenya s commercial banks and non-banking financial insiuions, ineres raes and oher publicaions and guidelines (Ouori, 2013). Furher according o CBK, (2008) as capured by Ouori, (2013), he banks have come ogeher under he Kenya Bankers Associaion (KBA), which serves as a lobby for he banks ineress and addresses issues affecing is members. According o Cenral Bank of Kenya (2011) Supervision Repor as of December 2011 as capured by Ongore, (2013) ou of he 43 commercial banks 30 of hem are domesically owned and 13 are foreign owned. Ongore, (2013) assered ha, in erms of asse holding, foreign banks accoun for abou 35% of he banking asses as of In Kenya he commercial banks dominae he financial secor. In a counry where he financial secor is dominaed by commercial banks, any failure in he secor has an immense implicaion on he economic growh of he counry (Ongore,2013). 1.2 Overview of Equiy Bank Limied Equiy Bank Limied, previously known as Equiy Building Sociey ( EBS ), commenced operaions in In he 1990s, EBS changed is focus o microfinance, argeing he under-served, low income populaion. The growh in business volumes and peneraion necessiaed he conversion o a commercial bank in 2004, and he company subsequenly lised on he Nairobi Sock Exchange in Augus 2006 (and laer he Uganda Securiies Exchange). Equiy Bank Limied is he holding company of he group s banking subsidiaries in Uganda, Souhern Sudan and recenly Rwanda esablished in 2011 and Tanzania esablished in February 2012 (Maina, 2013). According o CBK, Bank Supervision Repor 2012 as capured by Maina, (2013), he Bank is he larges lised bank in erms of cusomer numbers, wih a cusomer base of 8.3 Million and second larges in erms of asse base, which sands a KES 261.5B afer KCB wih an asse base of KES B. Equiy Bank was he mos profiable bank in 2012 wih a PBT of KES 16.1B represening a 7.4% and 37.6% increase in RoA and RoE respecively (Maina, 2013). The banking survey 2009 also noed Equiy bank as he bes bank in Kenya Objecives of he sudy Main Objecive The purpose of his sudy was o esablish he effec of macroeconomic facors on commercial banks profiabiliy in Kenya: case of equiy bank limied Specific Objecives The specific objecives of his sudy were o; i. Deermine effec of economic growh (real GDP) on bank profiabiliy in Kenya wih Equiy Bank in focus. ii. Examine effec of inflaion on bank profiabiliy in Kenya wih Equiy Bank in focus. iii. Evaluae effec of exchange rae on bank profiabiliy in Kenya wih Equiy Bank in focus. 1.4 Research Hypohesis The sudy focused on he following hypoheses such ha for he; i. Effec of economic growh on bank profiabiliy in Kenya wih Equiy Bank in focus ii. Economic growh (real GDP) does no affec bank profiabiliy in Kenya. 47

3 iii. iv. Economic growh ( real GDP) affecs bank profiabiliy in Kenya Effec of inflaion on bank profiabiliy in Kenya wih Equiy Bank in focus Inflaion does no affec bank profiabiliy in Kenya. Inflaion affecs bank profiabiliy in Kenya Effec of exchange rae on bank profiabiliy in Kenya wih Equiy Bank in focus Exchange rae does no affec bank profiabiliy in Kenya. Exchange rae affecs bank profiabiliy in Kenya. 1.5 Scope of he sudy This sudy on he effec of macroeconomic facors on commercial banks profiabiliy in Kenya: case of equiy bank limied was based on annual daa for he period 2008 o I should be noed ha in he year 2008 Equiy bank was awarded several awards (Bes bank in Kenya, bes bank in Eas Africa, bes performing Ai 100 company in Africa, Microfinance bank of he year) and i was he mos profiable bank in 2012 in Kenya wih a Profi before ax of KES 16.1B represening a 7.4% in ROA (Maina, 2013). 1.6 Theoreical Framework and Concepual Framework This sudy was modeled on he heory of producion. According o Kousoyianis (2003), a producion process is a combinaion of facor inpus required for he producion of one uni of oupu. A commodiy may be produced by various mehods of producion. The producion process as Kousoyianis (2003) pus encompasses a producion funcion which represens a echnical relaion connecing facor inpus and oupus. As applied o his sudy, he producion heory holds ha macroeconomic variables - facor inpus would influence bank profiabiliy (facor oupu), hus here is a funcional relaionship beween bank profiabiliy and macroeconomic variables. This sudy used Cobb- Douglas producion funcion o represen he funcional relaionship beween facor inpus (macroeconomic variables) and facor oupus (bank profiabiliy) in Kenya. According o Kousoyianis (2003), Cobb- Douglas producion funcion is one of he mos popular and easies forms of producion funcions in applied research represened as; Y = (1.1) AK α L β Where Y = Oupu A = Toal facor produciviy K= Capial L = Labour α and β = elasiciy coefficiens of capial and labor, respecively. The funcional relaionship beween macroeconomic variables and bank profiabiliy in Kenya is furher elaboraed by he concepual framework below; Figure 1.1: Concepual Framework for he relaionship beween Macroeconomic variables and bank Profiabiliy in Kenya Independen Variables Dependen Variables Macroeconomic Variables Profiabiliy -Real GDP -Inflaion Rae -Exchange rae ROA (Reurn on Asse) Source: auhor s self concepualizaion 48

4 In he concepual framework, he independen variables are concepualized as macroeconomic variables. The macroeconomic variables included; real GDP, inflaion, exchange rae. The dependen variable is bank profiabiliy proxied by Reurn on Asse (ROA). The framework posulaes ha he macroeconomic variables direcly affec bank profiabiliy in Kenya. This relaionship in he form of Cobb- Douglas producion funcion (1.1) is represened as; π ε τ Y = AE G I µ 1 (1.2) Where, Y = Profiabiliy (ROA), A = Toal facor Produciviy,, µ = error erm, ε π, τ 1 G = real GDP, I =inflaion, E =exchange rae,, = elasiciy coefficiens and = 2008, 2009,2010,2011, 2012 denoes ime period. 1.7 Organizaion of he Sudy The res of his paper is organized as follows: Secion 2 provides lieraure on he effec of macroeconomic variables on bank profiabiliy, secion 3 oulines he research mehodology and measuremen of he variables. Secion 4 provides resuls and discussion followed by summary, conclusions and recommendaions in secion Lieraure Review 2.1 Lieraure on Macroeconomic deerminans of Bank profiabiliy Sufian and Kamarudin (2012) idenified bank specific characerisics and macroeconomic deerminans of profiabiliy in he Bangladesh s banking secor over he years 2000 o 2010 using a sample of 31 commercial banks in Bangladesh. The deerminans were idenified using muliple regression analysis. The resuls revealed ha macroeconomic deerminans significanly influenced profiabiliy. The relaionship beween economic growh and bank performance is negaive and significan while he coefficien of inflaion was significan and posiive. Rao & Lakew (2012) explored he key deerminans of profiabiliy of commercial banks operaing in Ehiopia using panel daa se of banks over he period 1999/ /09. The exernal facors were relaed o he indusry and he macroeconomic scenarios wihin which he banks operae. The resul of he sudy indicaed ha exernal facors had a saisically insignifican effec. Inflaion was found o be saisically insignifican bu i is posiively relaed o bank profiabiliy. Real GDP growh rae effec was found o be saisically insignifican hough wih a posiive sign. Haron (2004) invesigaed he deerminans of Islamic bank profiabiliy and found ha CPI was posiively relaed o all profiabiliy measures, heir relaionship was no saisically significan Dierich &Wanzenried (2009) analyzed he profiabiliy of commercial banks in Swizerland over he ime period from 1999 o Their sample included observaions from 453 banks. Besides bank specific characerisics, hey included a se of macroeconomic and indusry-specific variables ino heir regression analyses. Their resuls showed ha he GDP growh rae affecs bank profiabiliy in Swizerland posiively, wih he coefficiens being significan a he 5% level. Ahanasoglou e al.,(2006) examined he profiabiliy behaviour of bank-specific, indusry relaed and macroeconomic deerminans, using an unbalanced panel daase of Souh Easern European (SEE) credi insiuions over he period The esimaion resuls indicaed ha he picure regarding he macroeconomic deerminans was mixed. Inflaion posiively and significanly affecs profiabiliy. Ongore (2013) Sudied moderaing effec of ownership srucure on bank performance by use of linear muliple regression model and Generalized Leas Square on panel daa of commercialbanks in Kenya o esimae he parameers. The findings showed ha GDP had an insignifican correlaion coefficien wih ROA, inflaion had significan negaive relaionship wih financial performance of commercial banks in Kenya. I had coefficiens of parameers wih ROA. Consaninos & Sofoklis (2009) invesigaed he effecs of bank-specific and macroeconomic deerminans of bank profiabiliy, using a panel daa approach of six Greek banks. The inflaion rae appeared o have a posiive bu sligh effec on bank profiabiliy. Oher macroeconomic variables invesigaed, such as GDP, were found o be highly insignifican. Ouori (2013) by invesigaing he Influence of exchange rae deerminans on he performance of commercial banks in Kenya sough o deermine he relaionship beween inflaion rae and bank profiabiliy in Kenya. The sudy found ha inflaion rae had a negaive and significan effec on bank profiabiliy. This effec was significan a 5% level of confidence. Ramadan e al, (2011) invesigaing he naure of he relaionship beween he profiabiliy of banks and he characerisics of inernal and exernal facors using a panel daa se of banks in Jordan. For his purpose 100 observaion of 10 banks over he period were comprised. Resuls associaed wih he macro-economic 49

5 deerminans; inflaion (INF) and economic growh (RGDP) showed a posiive insignifican impac on reurn on asses. Jasmine (2011) found ou he profiabiliy deerminans of commercial banks in Malaysia afer he 2008 financial crisis. 8 commercial banks were chosen o represen he commercial banks in Malaysia during he ime line from 2004 ill ROA was chosen as a dependen variable o esimae he commercial bank s profi, and 10 independen variables which are base lending rae, gross domesic producion, inflaion rae, capial adequacy raio, oal income, expenses managemen, ineres coverage, oal loans, oal deposis, and bank size. I was found ha base lending rae is a significan variable while inflaion rae was insignifican in deermining he profiabiliy of commercial banks in Malaysia. Flamini e al,.(2009) in heir sudy on he deerminans of commercial bank profiabiliy in Sub-Saharan Africa esablished ha Macroeconomic variables significanly affec bank profiabiliy in Africa. In paricular, inflaion had a posiive effec on bank profis; oupu growh had a significan posiive impac on bank profiabiliy. Li (2009) invesigaed he impac bank s specific facors and macroeconomic facors on bank.s profiabiliy, which is measured by reurn on average asses (ROAA) in he UK banking indusry over he period The resuls indicaed ha macroeconomic variables real GDP and inflaion) had insignifican effec which indicaed ha macroeconomic facors have lile impac on profiabiliy of banks. Zhang and Dong (2011) analyzed he profiabiliy of he U.S banking secor over he period from using OLS. Their profiabiliy deerminans included bank-specific characerisic as well as macroeconomic facors. They found ha he macroeconomic facors of GDP and ineres rae change were significan in explain bank profis. Babazadeh & Farrokhnejad (2012) examined he effecs of foreign exchange changes on Banks' operaions and profis by applying Error Correcion Model (ECM) on one of he commercial banks in Iran for he period of five years from 2006 o 2010.The resuls explain ha exchange rae was significan deerminan of profis. 2.2 Summary and Gap in Lieraure From he sudies reviewed, i is eviden ha several research works on he deerminans of bank profiabiliy in various pars of he world have been carried ou. However, he shor coming of hese reviews is ha mos sudies have relied on panel daa se which gives a generalized overview as opposed o bank specific characerisic. Furher from he sudies he effec of macroeconomic facors on bank profiabiliy is inconclusive wih some researcher finding insignifican effec while ohers esablishing significan influence. This sudy bridges his gap by use of annual daa involving Equiy Bank limied (Kenya) o esablish bank specific characerisics of he effec of macroeconomic facors on bank profiabiliy in Kenya wih Equiy bank in focus. 3. Research Mehodology This secion encompasses research design, model specificaion, daa collecion and daa presenaion. 3.1 Research design The sudy was based on correlaion research design. Oso & Onen (2011) argued ha correlaion design predics one variable from he oher and deermines wheher, and o wha degree, a relaionship exiss beween quanifiable variables. The sudy esablished he effec of macroeconomic facors on bank profiabiliy in Kenya wih Equiy bank limied in focus by use of correlaion coefficiens and regression analysis. 3.2 Model specificaion The model was adoped from he Cobb- Douglas producion funcion for esablishing he effec of macroeconomic facors on bank profiabiliy in Kenya wih Equiy bank limied in focus. The Cobb- Douglas producion funcion represened by equaion (1.2) ransformed ino naural logarihm became; ln = Π + π ln E + ε ln G + τ ln I + υ (3.1) Y ~ IIDN(0, σ Where υ ), which is he naural log for 1 µ and Π = ln A Measuremen of Variables Dependen Variable Guru e al., (1999) as capured by Rao & Lakew,(2012) assered ha raios insead of he real value of profis are used in measuring bank profiabiliy because raios are no influenced by variaions in he general price level and are he mos frequenly used raios in measuring bank profiabiliy in he baking lieraure Reurn on Asse (ROA) Reurn on Asses (ROA) indicaes how effecively a bank manages is asses o generae income (Davydenko, 2010).Compued as he banks afer ax profi over oal asses (Flemini e.,2009). ROA according o Flemini e al.,(2009) may be biased due o off-balance-shee aciviies, bu believe such aciviies are negligible in SSA banks Independen Variables Macroeconomic Variables 50

6 These are counry wide facors which are beyond he conrol of he company and reflec he economic environmen wihin which he commercial banks operae (Ongore, 2013) GDP Growh (Annual %) GDP is he sum of gross value added by all residen producers in he economy plus any produc axes and minus any subsidies no included in he value of he producs (World developmen indicaors, 2012). The sudy used he annual % of GDP growh of Kenya for he period Inflaion, Inflaion is measured by he consumer price index and reflecs he annual percenage change in he cos o he average consumer of acquiring a baske of goods and services ha may be fixed or changed a specified inervals, such as yearly (World developmen indicaors, 2012) Exchange rae Official exchange rae refers o he exchange rae deermined by naional auhoriies or o he rae deermined in he legally sancioned exchange marke. I is calculaed as an annual average based on monhly averages (local currency unis relaive o he U.S. dollar) (World developmen indicaors, 2012). 3.3 Correlaion Correlaion is concerned wih finding ou wheher here is an associaion beween variables and if here is deermines is srengh and direcion. This sudy used correlaion coefficiens obained from he correlaion marix o deermine if here exiss correlaion beween macroeconomic facors and bank profiabiliy in Kenya wih Equiy bank Limied in focus. 3.4 Regression analysis The sudy employed muliple regression analysis which refers o esing hypohesis abou he relaionship beween a dependen variable and wo or more independen variables and for predicion. In order o develop he relaionship beween rade openness and economic growh, he research work adoped he Ordinary Leas Square (OLS) as he esimaion echnique. The mehod of OLS is exensively used in regression analysis primarily because i is iniiaively appealing and mahemaically much simpler han any oher economeric echnique (Gujarai, 2003) Diagnosic Tess Inroducion This sudy carried ou various diagnosic ess o invesigae wheher he assumpions of classical linear regression analysis are saisfied which refer o; Saisical ess and economeric ess Saisical Tess The saisical ess involved -es and F-ess. The es was necessary in deermining he saisical significance of individual parameers and join significance wih he aid of he relevan disribuion ables Economeric Tess The economeric ess included; serial correlaion, mulicollineariy, heeroscedasiciy and he normaliy es disribuion of random variable Normaliy Tes Normaliy es was carried ou o verify if he error erms are normally disribued. The Jacque-Bera (JB) es was employed o ascerain his assumpion. The JB es saisic is given by; and follows a chi 2 disribuion wih 2 degrees of freedom. Where n= no. of observaions, s= skewness and k = kurosis. The es was based on he null hypohesis ha he residuals are normally disribued Auocorrelaion Tes Auocorrelaion or serial correlaion refers o he case in which he error erm in one ime period is correlaed wih he error erm in any oher ime period. The sudy employed he Durbin-Wason es. This es was based on he null hypohesis of no serial correlaion Mulicollineariy Tes Deecion was by high pair-wise correlaion among regressors. According o Gujarai (2004), he rule of humb is ha if he pair-wise correlaion coefficien beween wo regressors is high, in excess of 0.8, hen mulicollineariy is a serious problem Heeroscedasiciy Tes Heeroscedasiciy occurs when he variance of he error erm is no consan. The sudy employed Whie s General heeroscedasiciy Tes. Gujarai (2004) assers ha he general es of heeroscedasiciy proposed by Whie does no rely on he normaliy assumpion and is easy o implemen. 3.6 Daa Collecion Sources of Daa Daa used in he sudy was obained from official published documens of he World Bank; World Developmen Indicaors, Equiy bank; financial saemens, invesor briefings and Banking Survey. 51

7 3.6.2 Daa Analysis The sudy used inferenial daa analysis o analyze his quaniaive research daa. The echniques used included; correlaion and regression analysis inferenial daa analysis echniques. Oso and Onen (2009) assered ha correlaion is used when a researcher wans o describe he associaion beween wo or more variables in erms of magniude and direcion while regression analysis is used when a sudy is abou predicion of variables from oher predicor variables. Daa analysis was conduced using Economeric esimaion sofware Eviews. 3.7 Daa Presenaion Oso and Onen (2009) describe ables and figures as useful in presening findings because hey can summarize a lo of informaion in a small space. This sudy used ables and figures for presenaion of daa. 4. Resuls and Discussion 4.1 Dicussion of Findings Descripive saisics gives iniial indicaion of variables ha can be used in regression analysis giving several summarized saisics on a variable, e.g. mean, medium, sandard deviaion and also ofen he lowes and highes observaion (Johansen, 2011). The saisics in able 4.1 indicae ha economic growh (real GDP), Inflaion, exchange rae and bank profiabiliy (ROA) are normally disribued. Jarque-Bera es confirms ha he variables are normally disribued a 5% level of significance since he for each of he variables. According o Universiy of Reading (2011), he sandard deviaion represens he amoun of deviaion from he mean, (he smaller he sandard deviaion he more accurae fuure predicions may be, because here less variabiliy). In able 4.1, he resuls indicae ha bank profiabiliy (ROA), economic growh (real GDP), inflaion and exchange rae do no deviae much from he mean (he variables have smaller sandard deviaion) hus he more accurae are he fuure predicions. Given ha he skewness lies beween -3 and +3, i is implied ha he variables have normal curves wih ails o he lef. Furher, since he Kurosis for all he variables are posiive here are oo few cases in he ails (ligher ails). Table 4.1: Descripive Saisics LNY LNG LNE LNI Mean Median Maximum Minimum Sd. Dev Skewness Kurosis Jarque-Bera Probabiliy Sum Sum Sq. Dev Observaions Source: auhors compuaion using Eviews Correlaion This sudy involved idenifying he exisence of correlaion beween bank profiabiliy (ROA) and macroeconomic facors (economic growh- real GDP, inflaion and exchange rae) using correlaion coefficiens obained from he correlaion marix. The resuls summarized in able 4.2 indicae ha here exiss a weak insignifican posiive correlaion beween he macroeconomic variables (GDP, inflaion and exchange rae) and bank profiabiliy (ROA) a 5 % level of significance. Thus, bank profiabiliy and economic growh ( ), bank profiabiliy and inflaion, bank profiabiliy and exchange rae. 52

8 Table 4.2: Correlaion Marix Covariance Analysis: Ordinary Dae: 11/09/13 Time: 16:54 Sample: Included observaions: 5 Correlaion -Saisic Probabiliy LNY LNG LNE LNI LNY LNG [ ] (0.8180) LNE [ ] [ ] (0.8115) LNI [ ] [ ] [ ] (0.7199) (0.0980) (0.5477) Noe: () indicae p-value and [] indicae -saisic, Source: auhor s compuaion using Eviews 7.1 version 4.3 Regression Analysis In order o answer he research objecives, he sudy employed muliple regression analysis using OLS. The firs objecive of his sudy was o deermine he effec of economic growh on bank profiabiliy in Kenya wih Equiy bank limied in focus. The resuls in able 4.3 indicae ha economic growh (real GDP) has an insignifican posiive effec on bank profiabiliy a 5 % level of significance. This sudy herefore does no rejec he null hypohesis ha economic growh (real GDP) does no affec bank profiabiliy in Kenya wih equiy bank in focus. our finding of insignifican posiive relaionship beween bank profiabiliy (ROA) and economic growh (real GDP) in Kenya wih Equiy bank limied in focus is consisen wih he findings of Rao & Lakew (2012), Ramadan e al., (2011), Ongore (2013). The second objecive of his sudy was o examine effec of inflaion on bank profiabiliy in Kenya wih Equiy Bank in focus. The resuls in able 4.3 indicae ha inflaion has a posiive insignifican effec on bank profiabiliy a 5 % level of significance. Thus, he sudy does no rejec null hypohesis ha inflaion does no affec bank profiabiliy in Kenya wih Equiy bank in focus. This finding is consisen wih Ongore (2013), Ouori (2013), Jasmine (2011), Rao & Lakew (2012). The hird objecive of his sudy was o evaluae effec of exchange rae on bank profiabiliy in Kenya wih Equiy Bank in focus. Table 4.3 resuls indicae ha exchange rae has an insignifican negaive effec on bank profiabiliy a 5 % level of significance. The sudy herefore does no rejec he null hypohesis ha exchange rae does no affec bank profiabiliy in Kenya wih Equiy bank in focus. The resuls are consisen wih he findings of Babazadeh & Farrokhnejad (2012). F- Saisic of indicaed ha he macroeconomic variables joinly have an insignifican effec a 5% level of significance on bank profiabiliy in Kenya wih Equiy bank Limied in focus. 53

9 Table 4.3: OLS Tes resuls Dependen Variable: LNY Mehod: Leas Squares Dae: 11/09/13 Time: 16:56 Sample: Included observaions: 5 LNY=C(1)+C(2)*LNG+C(3)*LNE+C(4)*LNI Coefficien Sd. Error -Saisic Prob. C(1) C(2) C(3) C(4) R-squared Mean dependen var Adjused R-squared S.D. dependen var S.E. of regression Akaike info crierion Sum squared resid Schwarz crierion Log likelihood Hannan-Quinn crier F-saisic Durbin-Wason sa Prob(F-saisic) Source: auhor s compuaion using Eviews Diagnosic Tes Resuls Saisical Tes of Elasiciy Coefficiens This is a firs order es for he deerminaion of he saisical significance of he parameers o evaluae heir saisical reliabiliy. Saisical ess included; -es and F- es o es for he saisical significance of individual parameers and model respecively es This es involved he use of -es by esing he below saed hypohesis wih he es resuls presened in able parameer insignifican, parameer significan The rule of humb was ha we rejec he null hypohesis if, oherwise do no rejec. Table 4.4: - es Resuls and decision Rule OLS Model n=5, df=1 Variable -calculaed -criical Decision Conclusion Do no rejec, saisically insignifican Do no rejec, insignifican Do no rejec, insignifican Source: auhor s compuaion F-es The F-es was employed o esablish wheher he model is significan. The compued F-value of was compared wih F-criical obained from he F-disribuion able wih degrees of freedom (k-1, n-k) and level of significance. Wih an F-criical of 216 i implies ha he model is insignifican Economeric Tess Normaliy The normaliy es was based on he null hypohesis of normaliy disribuion of he residuals. The resuls in figure 4.1 indicae ha we do no rejec he null hypohesis of normaliy disribuion a 5% level of significance. Thus he residuals are normally disribued. 54

10 Figure 4.1: Normaliy es resuls Series: Residuals Sample Observaions 5 Mean 1.24e-15 Median Maximum Minimum Sd. Dev Skewness Kurosis Jarque-Bera Probabiliy Source: auhor s compuaion using Eviews Serial Correlaion The sudy employed Durbin- Wason es. From able 4.3 he value of (approximaely 2) for he Durbin- Wason saisic indicaes ha he null hypohesis of no serial correlaion is no rejeced. This implies ha he residuals are no serially correlaed Heeroscedasiciy Based on he null hypohesis of no heeroscedasiciy. The resuls in able 4.5 indicae ha we do no rejec he null hypohesis implying ha he residuals are homoscedasic. Table 4.5: Heeroskedasiciy Tes: Whie F-saisic Prob. F(3,1) Obs*R-squared Prob. Chi-Square(3) Scaled explained SS Prob. Chi-Square(3) Source: auhor s compuaion using Eviews Mulicollineariy Deecion was by high pair-wise correlaion among regressors. Resuls in able 4.2 show ha he pair-wise correlaion coefficien beween wo regressors is no in excess of 0.8, hence mulicollineariy is no a serious problem. 5. Summary, Conclusions and Recommendaions 5.1 Inroducion This chaper presens a summary of he findings of he sudy on he effec of macroeconomic facors on bank profiabiliy in Kenya wih equiy bank in focus, conclusions, and policy recommendaions. 5.2 Summary of Findings and Conclusions This sudy invesigaed he effec of macroeconomic facors on bank profiabiliy in Kenya wih equiy bank limied in focus. In view of he inconclusive findings on he effec of macroeconomic facors on bank profiabiliy among researchers, he sudy was o esablish he effec of macroeconomic facors on bank profiabiliy in Kenya wih Equiy bank in focus. The sudy specifically sough o deermine, esablish and examine effec of; economic growh (real GDP), inflaion and exchange rae on bank profiabiliy in Kenya wih Equiy bank in focus respecively using annual daa for he period of 5 years spanning from 2008 o The effec of macroeconomic facors on bank profiabiliy in Kenya wih Equiy bank in focus was examined using muliple regression analysis. The OLS resuls show ha macroeconomic facors have insignifican effec on bank profiabiliy in Kenya wih equiy bank in focus. Specifically; economic growh (real GDP) and inflaion have a posiive insignifican effec whereas exchange rae has a negaive insignifican effec a 5 % level. These resuls are consisen wih he findings of Rao & Lakew (2012), Ramadan e al., (2011), Ongore (2013). I can herefore be concluded ha inernal facors which are basically influenced by he inernal decisions of managemen and board deermine he performance of banks in Kenya. I is herefore pruden for he bank managemen as Ongore (2013) argued o enhance managerial efficiency ha will lead o higher performance. References Alexiou,C.& Sofoklis,V.(2009). Deerminans of Bank Profiabiliy: Evidence from he Greek Banking Secor. Economic Annals, Volume LIV No. 182 / July Sepember 2009 UDC: 3.33 ISSN:

11 Babazadeh,M. & Farrokhnejad,F. (2012). Effecs of Shor-run and Long-run Changes in Foreign Exchange Raes on Banks' Profi. Inernaional Journal of Business and Managemen; Vol. 7, No. 17; 2012 ISSN E-ISSN Banking Survey, (2009). Global Economic Recession Does Lile o Dampen Prospecs. Dierich,A. & Wanzenried,G. (2009). Wha Deermines he Profiabiliy of Commercial Banks? New Evidence from Swizerland. Insiue of Financial Services IFZ, Lucerne Universiy of Applied Sciences, Grafenauweg 10,6304 Zug, Swizerland Equiy Bank, (2007). Annual repor and Financial Saemens. Equiy Bank, (2010). Invesor Briefing. Equiy Bank, (2012). Invesor Briefing. Equiy Bank, (2012). Financial Saemens as a 31 s December Flamini,V.,McDonald,C.& Schumacher,L.(2009). The Deerminans of Commercial Bank Profiabiliy in Sub- Saharan Africa. IMF Working Paper, WP/09/15 Gujarai, D.N. (2004). Basic Economerics (4 h ed.). The McGraw Hill Companies Haron,S. (2004). Deerminans of Islamic Bank Profiabiliy. Global Journal of Finance and Economics. USA, Vol 1, No 1, March Jasmine,E. (2008). An Empirical Analysis of Commercial Banks Profiabiliy Deerminans in Malaysia afer he 2008 Financial Crisis. A Research Projec Submied in Parial Fulfillmen of he Requiremen for he Degree of Bachelor of Business Adminisraion (Hons) Banking and Finance. Universiy of Tunku Abdul Rahman. Kousoyiannis,A. (2003). Modern Microeconomics (2 nd ed.). London: Macmillan Press Ld Li,Y.(2009). Deerminans of Banks. Profiabiliy and is Implicaion on Risk Managemen Pracices: Panel Evidence from he UK in he Period A Disseraion presened in par consideraion for he degree of MA in Risk Managemen. The Universiy of Noingham Ongore,V.O (2013). Deerminans of Financial Performance of Commercial Banks in Kenya. Inernaional Journal of Economics and Financial Issues, Vol. 3, No. 1, 2013, pp ISSN: Oso,W.Y. and Onen,D. (2009). Wriing Research Proposal and Repor: A handbook for beginning researchers (Revised Ediion). Kenya: The Jomo Kenyaa Foundaion Ouori, O. H. (2013). Influence of exchange rae deerminans on he performance of commercial banks in Kenya. European Journal of Managemen Sciences and Economics, 1(2), Panayiois P. Ahanasoglou,P,P.,Delis,M,D. & Saikouras,C,K.(2006). Deerminans of Bank Profiabiliy in he Souh Easern European Region. Bank of Greece Economic Research Deparmen Workig Paper No.47. ISSN Ramadan,I.Z., Kilani,Q.A.& Kaddumi,T.A. (2009). Deerminans of Bank Profiabiliy: Evidence from Jordan. Inernaional Journal of Academic Research, Vol. 3. No. 4. Rao,K,R,M.& Lakew,T,B.(2012). Deerminans 0f Profiabiliy of Commercial Banks in A Developing Counry: Evidence from Ehiopia. Inernaional Journal of Accouning and Financial Managemen Research (IJAFMR).ISSN Vol. 2 Issue 3 Sep Sufian,F. & Kamarudin,F. (2012). Bank-specific and Macroeconomic Deerminans of Profiabiliy of Bangladesh s Commercial Banks. Bangladesh Developmen Sudies. Vol. XXXV, December 2012, No. 4 World Bank (2012). World Developmen Indicaors. Zhang,C. & Dong,L.(2011). Deerminans of Bank Profiabiliy: Evidence from he U.S Banking Secor. Research Projec Submied in Parial Fulfillmen of he Requiremens for he Degree of Maser of Financial Risk Managemen. Simon Fraser Universiy Appendix: Daa Presenaion Year GDP(%) Inflaion(%) Exchnge Rae ROA (%) Source: Equiy Bank, (2007). Annual repor and Financial Saemens Equiy Bank, (2010). Invesor Briefing Equiy Bank, (2012). Invesor Briefing Equiy Bank, (2012). Financial Saemens as a 31 s December 2012 World Bank (2012), World developmen Indicaors 56