Funding Sources, Competitiveness and Performance of Commercial Banks in Kenya

Abstract

The nature of the funding source a commercial bank decides to adopt is a key performance determinant. Ideally, banks make use of either shareholders’ equity, borrowed funds, or customers' deposits to finance their operations. The liberalization in the sector has made it possible for many players to exist and as a result, each player has had to come up with a unique competitive way that allows them to attract and retain the best funding sources capable of yielding positive performance. Much as there are studies that have sought to investigate the concept of funding and performance among commercial banks, both in developing and developed economies, the studies yield mixed findings. This study sought to determine the mediating effect of the bank’s competitiveness on the relationship between funding sources and performance. A descriptive research design was adopted and used to evaluate the two hypotheses formulated for each of the study’s objectives. Secondary data obtained from 35 commercial banks that have been consistently operating in Kenya was gathered between the years 2011 to 2021. Findings obtained from the fixed effect regression model after performing a four-step regression mediation procedure indicate that bank competitiveness has a mediating effect on the relationship between funding sources and performance. This finding point to the need for both policymakers and implementers to come up with clear policies that can enable banks to utilize funds obtained from various sources more prudently and in the process ensure their performance remains optimum.