Abstract:
Banks are the main part of the financial sector in any economy performing valuable activities on both sides of the balance sheet The study was motivated by the inability of current key performance measures (return on equity and return on assets) being able to detect some of the poor performing banks which collapsed during the global financial crisis of 2008. In addition, although the banking sector constitutes a large part of the financial system in the East African
Community (EAC), there is no consensus on a performance measure for commercial banks in
the member nations, more so, as the region moves toward further integration and
subsequently a monetary union. The study therefore evaluated the performance measures and proposed an overall performance measure (OPM) that combines the key attributes of productivity and profitability and examined the theoretical relationships between market structure, financial structure, economic growth and bank performance measures for commercial banks in the EAC region. The study used cross country data analysis of 100 commercial banks and collected secondary data from annual published audited financial statements for the period 1997-2011. The results indicate that the OPM which combines productivity and profitability captured a high percentage of similar banks when the top 20 commercial banks were ranked; 80% for return on assets, 60% for profit margin and 55% for net interest margin. A positive and significant relationship between economic growth and performance measures was confirmed. Similarly market structure had a positive relationship with the performance. The results further showed an insignificant relationship with financial structure which conforms to the financial structure theory. The OPM will enable central banks to assess the performance levels of banks and be able to detect those that are under performing and take corrective measures to either improve productivity, profitability or both. For policy makers in the EAC secretariat, the measure will enable comparison on the performance of banks in East Africa for subsequent integration to the monetary union.
