Effect of Efficiency on the Relationship between Organization Characteristics and Financial Performance of Commercial Banks in Kenya

Kennedy Ochuka, Kennedy Okiro and Fredrick Ogilo
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Kennedy Ochuka: University of Nairobi, School of Business, Department of Finance and Accounting
Kennedy Okiro: University of Nairobi, School of Business, Department of Finance and Accounting
Fredrick Ogilo: University of Nairobi, School of Business, Department of Finance and Accounting

International Journal of Research and Innovation in Social Science, 2024, vol. 8, issue 7, 2613-2623

Abstract: The purpose of the study was to establish the intervening effect of efficiency on the relationship between organization characteristics and financial performance of commercial banks in Kenya. The study used unbalanced panel data sourced from the Central Bank of Kenya for the period 2011 to 2021 across the 43 commercial banks. Organization characteristic was measured using weighted composite index of total assets, liquidity risk, asset quality, management quality, non-traditional activities and technological innovation; efficiency was captured using data envelopment analysis; while financial performance was measured using a weighted composite index derived from return on assets and net interest margin. The relationship was assessed using the Baron and Kenny (1986) model. The study found that there was statistically significant relationship between organization characteristics and financial performance (β = .575, p = .000, R2 = .801) in the absence of intervention effect. The interaction between organization characteristic and efficiency was statistically significant (β = -.133, p = .001, R2 = .025). The interaction between efficiency and financial performance was statistically significant (β = -.132, p = .003, R2 = .030). Further the overall interaction between organizational characteristic, efficiency and financial performance was statistically significant (β = .572, p = .000, R2 = .802). The results implied that efficiency mediates the relationship between organization characteristic and financial performance. The results imply organization characteristic are some of the critical determinants of financial performance of commercial banks. The banks should take into account their levels of efficiency in order to attain higher levels of financial performance. The study adds value to policy makers, banking regulators and managers in understanding the influence of organization characteristics of banks and efficiency on the financial performance of the banks. The banking regulations should aim to move banks to attain levels of efficiency that enhance financial performance.

Date: 2024
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