Effect of Bank Size on Earnings Retention for Investment by Commercial Banks in Kenya

Abstract

The Kenyan economy has continued to register dismal performances in the last few years and banks can play a facilitative function because of their intermediary role. The study sought to find out if the size of a commercial bank has any influence on its level of earnings retention for investment. The retention of earnings by a bank each financial year can have critical importance because it provides a source of funds for investment. The findings of the study are helpful to the management of commercial banks in education to shareholders. The study was anchored on the pecking order theory. The bank size parameters were cash at Central Bank of Kenya and property assets, net borrowed funds, investor funds, and the paid dividend. Though the total banks' population was 39, the study involved 36 banks as units of analysis. To test the impact of size on earnings retention in commercial banks in Kenya, a linear regression model was run. Analysis of the data revealed that 83 % of banks’ earnings retention is influenced by cash at CBK and property assets, net borrowed funds, investor funds, and paid dividends. The results pointed out that, cash at CBK and Property assets, net borrowed funds, and investors’ funds have a positive significant impact on earnings retention while paid dividends have an insignificant impact on earnings retention. Any commercial bank intending to expand its operations by use of retained earnings should work towards increasing variables with significant positive influence or decreasing the parameters with significant negative influence. By this, the commercial banks in Kenya will maximize utilization of the cheapest source of funds for investment and this will also lead to increased earnings due to reduced expenses related to capital acquirement from other sources.