| dc.description.abstract | Financial performance of commercial banks in any economy continue to be a huge indicator of
growth and development. Commercial banks form a huge part of the Finance and Insurance
sector in Kenya. However, growth in this sector recorded a decline from 11.8 percent reported
in 2021 to 9.4 percent reported in 2022. According to the Central Bank of Kenya, a huge
contributor towards this decline was due to an increased credit to the Kenyan Government and
private firms. Commercial banks continue to be the major holders of debt across various
governments in Africa. In Kenya alone, commercial banks benefit greatly from income
derived from public debt. However, a huge share of debt holding can be detrimental to crucial
operations and functions of commercial banks such as reduced lending to other industries in
the private sector. The increasing amounts of public debt in Kenya in the past few years makes
it important to study its effect on the performance of commercial banks. Therefore, this study
sought to tackle four objectives with the general objective; to establish the effect of public debt
on the FP of commercial banks in Kenya. The specific objectives sought to examine the effect
of DD, ED, and real interest rates on the FP of commercial banks. Many studies highlight the
importance of FDI; hence, this particular study seeks to confirm its intervening effect on the
independent and dependent variables. The study primarily used a descriptive research design
to determine how the variables connected. Furthermore, the study included secondary data
from the Central Bank of Kenya, the World Bank, KNBS (KNBS), and the International
Monetary Fund (IMF). Descriptive analysis showed the general trend of the variables under
study. The correlational analysis indicated a strong negative relationship between external
debt and financial performance (-0.727), a strong negative relationship between domestic debt
and financial performance (-0.699), a weak positive relationship between real interest rates
and financial performance (0.195) and a positive relationship between foreign direct
investment and financial performance (0.530). The quarterly time series data was initially
subjected to the Augmented Dickey-Fuller (ADF) test to determine if there were any unit
roots. ROE, ED, DD, and FDI remained constant at the initial difference. However, real
interest rates remained stable at their current level. The I (0) and I (1) series were then
subjected to the Bounds Cointegration test, which demonstrated no long-term link between the
variables. The ARDL (ARDL) model was then utilized to determine the relationship between
public debt and financial performance of Kenyan commercial banks from 2008:q1 to 2022:q4.
The regression model estimates were (-0.899, p<0.05), (-0.3383239, p<0.05), and (
0.0766451, p<0.05) for external debt, domestic debt and real interest rates. The study's
findings also demonstrated a positive and statistically significant intervening effect of FDI on
the relationship between state debt and the financial performance of Kenyan commercial
banks where R22-R12=0.0051, p<0.05. To achieve maximum financial performance, the
Kenyan government should monitor the public debts which are continually negatively
affecting the profitability of commercial banks. The Government should encourage more FDI
inflows that will positively increase money supply and demand which are critical functions of
commercial banks. | en_US |
