RELATIONSHIP BETWEEN OPERATIONAL EFFICIENCY AND GROWTH OF COMMERCIAL BANKS IN KENYA BY ERIC KANG’ETHE RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE OF MASTERS OF BUSINESS ADMINISTRATION, SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI OCTOBER, 2009 DECLARATION This research project report is my original work and has not been submitted for a degree in any other University. Signed ERIC KANG'ETHE D61/P/8463/04 This management research project has been submitted for examination with my approval as University NAME: MOHAMED N. MWACHITI LECTURER, DEPARTMENT OF FINANCE AND ACCOUNTING UNIVERSITY OF NAIROBI i DEDICATION To all of you who made me what I am today ii ACKNOWLEDGEMENT I thank the Almighty God for the life. Thank you for being with me all through. I acknowledge my family for being beside me all the way. Your support and encouragement has seen me this far. I also acknowledge my supervisor, Mr. Mohamed Mwachiti, who guided me throughout the research period. I also acknowledge the entire staff and management of Central Bank of Kenya and Capital Markets Authority and for allowing me to gather information concerning organisations surveyed. Your contribution to this research cannot be underestimated. iii TABLE OF CONTENTS DECLARATION............................................................................................................................................................................................i DEDICATIO N.............................................................................................................................................................................................. ii ACKNOWLEDGEMENT........................................................................................................................................................................ iii LIST OF TABLES........................................................................................................................................................................................ vi LIST OF FIGURES.....................................................................................................................................................................................vii LIST OF A C R O N Y M S ...........................................................................................................................................................................viii ABSTRACT................................................................................................................................................................................................... ix Chapter 1: Introduction..................................................................................................................................1 1.1 Background of the Study.............................................................................................................. 1 1.2 Problem Statement........................................................................................................................ 4 1.3 Research Objective........................................................................................................................ 5 1.4 Research Questions....................................................................................................................... 5 1.5 Significance of the Study............................................................................................................... 5 Chapter 2 - Literature Review........................................................................................................................6 1. Introduction......................................................................................................................................... 6 2. Banking Industry in Kenya..................................................................................................................6 3. Banking Industry in Africa..................................................................................................................8 4. Growth Sustainability in Banks.........................................................................................................10 5. Banks Operational Efficiency............................................................................................................ 12 5.1 Structure-Performance Conduct (SCP) and Efficiency Hypothesis..........................................13 5.2 Bank Mergers and Acquisitions................................................................................................. 15 5.3 Bank Competition and Efficiency...............................................................................................16 5.4 Bank Deregulation and Efficiency..............................................................................................16 6. Bank Growth and Bank Efficiency.....................................................................................................17 7. Gap.....................................................................................................................................................18 Chapter 3 - Research Methodology............................................................................................................ 19 3.1 Introduction..................................................................................................................................... 19 3.2 Research Design...............................................................................................................................19 3.3 Research Population........................................................................................................................ 19 3.4 Sampling Design..............................................................................................................................19 3.5 Data Collection Methods..................................................................................................................20 3.6 Data Analysis................................................................................................................................... 20 Chapter 4 - Data Analysis And Findings....................................................................................................23 4.1 Introduction................................................................................................................................... 23 4.2 Efficiency of commercial banks in Kenya...................................................................................... 23 4.3 Relationship between efficiency and growth................................................................................. 26 Chapter Five - Summary, Conclusions And Recommendations...............................................................29 5.1 Introduction................................ „v>»............................................................................................ 29 5.2 Summary........................................................................................................................................29 5.3 Conclusions................................................................................................................................... 30 5.4 Recommendations......................................................................................................................... 31 5.5 Areas for further research..............................................................................................................31 REFERENCE.................................................................................................................................................32 iV APPENDICES............................................................................................................................................................... I Appendix 1: Bank Deposits.........................................................................................................................I Appendix 2: Bank Advances.....................................................................................................................Ill Appendix 3: Interest Rates........................................................................................................................ V Appendix 4: Earning Assets.................................................................................................................... VII LIST OF TABLES Table 1: Efficiency and Growth of Commercial Banks in Kenya (1998-2007)...............48 Table 2: Regression statistics....................................................................................................50 Table 3: ANOVA.........................................................................................................................51 Table 4: Regression Coefficients..............................................................................................51 VI LIST OF FIGURES Figure 1: Growth Indicators 31 VII LIST OF ACRONYMS BBK - Barclays Bank of Kenya Limited. CBA - Commercial Bank of Africa Limited DEA - Data Envelopment Analysis GDP - Gross Domestic Product KCB - Kenya Commercial Bank Limited. NIM - Net Interest Margin NPL - Non Performing Loans ROA - Return on Assets ROE - Return on Equity SCB - Standard Bank of Kenya Limited. SSA - Sub Saharan Africa TFA - Thick Frontier Approach viii ABSTRACT The research aims to examine whether