Relationship Between Bank Size and Profitability of Commercial Banks in Kenya

Abstract

This study sought to establish the relationship between firm size and profitability of commercial banks in Kenya. The study followed a descriptive research design and used secondary data obtained from the company annual reports and partly from the central bank of Kenya. Bank size was measured using annual bank deposits and annual gross loans advanced in a bank while profitability was measured using the annual net profit after tax for each bank for the five years’ period (2012-2016). Data was collected using secondary data collection sheet from annual bank supervision reports for the respective period. Data was analyzed using SPSS version 23 through stepwise regression analysis to determine the relationship between each of the measures of size and profitability of the bank. The data was tested for normality of response variable, homoskedasticity, multicollinearity and independence. The study established an overall y and R-Square of 0.790 and 0.624 respectively indicating an overall positive correlation which is moderately strong. Both regressors were found to be statistically significant. The study concluded that firm size as measured by customer deposits and loans advanced had a positive relationship with profitability of commercial banks in Kenya. The study recommends that banks should endeavor to maintain high levels of deposits as they have a strong bearing on the profitability of banks in Kenya. This conforms to the financial intermediation theory in an active baking sector.