Commercial banks play a vital role in the economic resource allocation of countries. They
channel funds from depositors to investors continuously. They can do so, if they generate necessary income to cover their operational cost they incur in the due course. In other words for sustainable intermediation function, banks need to be profitable. Beyond the intermediation function, the financial performance of banks has critical implications for economic growth of countries. Good financial performance rewards the shareholders for their investment. This, in turn, encourages additional investment and brings about economic growth. On the other hand, poor banking performance can lead to banking failure and crisis which have negative repercussions on the economic growth.
Thus, financial performance analysis of commercial banks has been of great interest to academic research since the Great Depression Intern the 1940’s. In the last two decades studies have shown that commercial banks in Sub-Saharan Africa (SSA) are more profitable than the rest of the world with an average Return on Assets (ROA) of 2 percent (Flamini et al., 2009). One of the major reasons behind high return in the region was investment in risky ventures. The other possible reason for the high profitability in commercial banking business in SSA is the existence of huge gap between the demand for bank service and the supply thereof. That means, in SSA the number of banks are few compared to the demand for the services; as a result there is less competition and banks charge high interest rates. This is especially true in East Africa where the few government owned banks take the lion's share of the market. The performance of commercial banks can be affected by internal and external factors (Al-Tamimi, 2010; Aburime, 2005). These factors can be classified into bank specific (internal) and macroeconomic variables. The internal factors are individual bank characteristics which affect the bank's performance. These factors are basically influenced by the internal decisions of management and board. The external factors are sector wide or country wide factors which are beyond the control of the company and affect the profitability of banks.
Studies show that performance of firms can also be influenced by ownership identity (Ongore,
2011). To study the effect of ownership identity, we introduced the concept of moderating variable. In this study the ownership identity is classified into foreign and domestic. The domestic vis-à-vis foreign classification is based on the nature of the existing major ownership identity in Kenya. According to Central Bank of Kenya (2011) Supervision Report as of December 2011 out of the 43
commercial banks 30 of them are domestically owned and 13 are foreign owned. In terms of asset holding, foreign banks account for about 35% of the banking assets as of 2011. In Kenya the commercial banks dominate the financial sector. In a country where the financial sector is dominated by commercial banks, any failure in the sector has an immense implication on the economic growth of the country. This is due to the fact that any bankruptcy that could happen in the sector has a contagion effect that can lead to bank runs, crises and bring overall financial crisis and economic tribulations. Despite the good overall financial performance of banks in Kenya, there are a couple of banks declaring losses (Oloo, 2011). Moreover, the current banking failures in the developed countries and the bailouts thereof motivated this study to evaluate the financial performance of banks in Kenya. Thus, to take precautionary and mitigating measures, there is dire need to understand the performance of banks and its determinants.
This study utilized CAMEL approach to check up the financial health of commercial banks, Intern line with the recommendations of the Basel Committee on Banking Supervision of the Bank of International Settlements (BIS) of 1988 (ADB in Baral, 2005).
Most studies conducted in relation to bank performances focused on sector-specific factors
that affect the overall banking sector performances (Chantapong, 2005; Olweny and Shipho, 2011 and Heng et al., 2011). Nevertheless, there is a need to include the macroeconomic variables. Thus, this study has incorporated key macroeconomic variables (Inflation and GDP) in the analysis. Moreover, this study examined whether ownership identity has influenced the relationship between bank performance and its determinants.
