Financing Decisions in Commercial Banks: A Case of Commercial Banks in Kenya

Abstract

The purpose of this study was to investigate the factors influencing the long term financing decisions undertaken by commercial banks in Kenya. The specific objectives that guided this study were to determine the sources of funds for commercial banks, to detennine the internal factors that influence choice of finance for commercial banks and to determine the external factors that influence choice of finance for commercial banks. The study utilized an exploratory research design. The population consisted of all commercial banks regulated by the Banking Act Cap 488 of Kenya which consisted of forty-three commercial banks. A convenience non-probability sampling approach was undertaken on all commercial banks that made up the sampling frame. The sample size therefore consisted of the thirty-one banks that participated. Primary data was obtained by use of a questionnaire that examined the extents to which various factors influenced long term financing decisions. Secondary data was extracted from the published audited financial reports of the sampled banks for a period of five years (2007-201 1) so as to establ ish a trend in their funding options for the period . The Statistical Package for Social Sciences (SPSS) was the primary software that was used to input, organize and analyze both pri mary and secondary data. Data was analyzed through descriptive statistics and correlation tests l ike Pearsons, Kendall and Spearman. Correlation tests hel ped i n establ ish ing the extent and direction of the interaction of various factors and sources of finances. For ease of presentation of the analysis, frequency tables, l ine graphs and means plots were used. The research study establ ished that banks heavily relied upon customer deposits to facilitate their long term financing decisions for the period under review. The empirical evidence from this study establ ished that internal variables like profitabil ity, volati l ity of earn i ngs, corporate tax, growth, asset structure, ownership structure, internally generated funds, market cond itions, reserve borrowing capacity and loan covenants signi ficantly influenced financing decisions of banks. On the other hand, bank size, d il ution of control, early repayabi l ity, floatation costs, operating risks and agency costs were insignificant in influencing financing decisions of banks In addition, the empirical evidence from the study also established that external variables like economic cond itions, exchange rates, interest rates, inflation rates, availability of finance, degree of competition in the ind ustry, legal restrictions and lender's attitude significantly influenced financi ng decisions of banks. The study recommended that there is a need for banks to look towards other avenues like public listings and floating corporate bonds given the abundant opportunities that lie within the local and East African stock markets to facilitate their long tenn capital investments given that banks with i n the med ium and large peer classification have the capacity to leverage such financing sources. The study also proposed that there is need for the regulators and policymakers to formulate policies that contai n the adverse effects of external variables on the decision making processes of the banks. Such bodies also need to look into ways in which competition within the banking industry remains healthy and ensures susainabil ity of banks within al l peer classes. Further research studies are req uired to establ ish the channels that the various banking industries within the continent and around the world have embraced to sustain their growth. In add ition, studies are needed to determine how bank ownership structures, inflation, interest and exchange rates influence capital structure decisions in the local context.