Operational Efficiency and Asset Quality: Evidence from Commercial and Microfinance Banks in Kenya
Keywords:
Operational Efficiency, Asset Quality, Commercial Bank, Microfinance banks, panel data analysisAbstract
The asset quality of commercial and microfinance banks in Kenya plays a crucial role in maintaining the stability of the country’s financial sector. However, these banks have faced challenges with poor asset quality. This study aimed to determine the effect of operational efficiency on the asset quality of commercial and microfinance banks in Kenya. It was underpinned by Efficient Structure Theory and guided by the philosophical underpinnings of realism and objectivism, employing an explanatory research design. The target population comprised all 38 commercial and 14 microfinance banks licensed by the Central Bank of Kenya as of December 31, 2024. Unbalanced panel data analysis was used to examine both cross- sectional and time-series effects of operational efficiency on asset quality. The study period was 2014 to 2024. The study employed descriptive and inferential statistics. Diagnostic tests were conducted to validate the assumptions of panel regression. Panel regression results revealed that the model was statistically significant (F = 52.922, p < 0.001) in explaining the relationship between operational efficiency and asset quality. The findings showed that operational efficiency had a positive and significant effect on asset quality (β = 0.089, p =
0.000). Hypothesis testing confirmed that operational efficiency (p < 0.05) significantly influences asset quality. The study concluded that operational efficiency is a key determinant of asset quality. In view of these findings, the study recommends that regulators and banks consider incorporating operational efficiency as one of the rating parameters for banks.
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