Mergers And Acquisitions And Performance Of Commercial Banks In Kenya

Abstract

Commercial banks and other financial sector players have faced a myriad of challenges ranging from globalization, heightened competition, uncontrolled market and unfavourable government policy. In Kenya most banks have gone into receivership and others winding up due to entry of many players into the market and therefore high competition. This had led to dwindling of profits, returns on assets, reduced investments and therefore instability. Majority of the commercial banks have cut on their human resource and branch network all aimed at lean operations. Mergers and acquisitions among financial institutions have been a common happening in the world Economy. This has been influenced by the challenges of globalization and fast technological changes and as a consequence, firms are facing intense competition. To face the challenges and explore the partial market opportunities, firms are going for inorganic growth through several strategic alternatives like mergers and acquisitions strategic alliances and joint ventures. Mergers and acquisitions (M&A) are being increasingly used world over for improving competitiveness of companies through gaining greater market share, broadening the portfolio to reduce business risk, for entering new markets and geographies, and capitalizing on economies of scale not forgetting strategic positioning. The main objective of this study was to establish the impacts of mergers and acquisitions on the performance of commercial banks in Kenya. The specific objectives of the study were; to examine the effect of capital base on performance of mergers of commercial banks in Kenya, to determine effects of asset quality on mergers and acquisition and finally, to determine the relationship between liquidity and performance of mergers of commercial banks in Kenya. The study adopted a descriptive research design. The unit of observation was the 16 banks that merged or were acquired in Kenya during the study period of 2000 to 2010 while the unit of analysis was the individual banks’ annual financial reports. . The study used secondary sources of data from published and audited annual reports of accounts for the population of interest, C.B.K., N.S.E., C.M.A., and bank supervision annual reports from C.B.K. The data was analyzed using SPSS and computation of financial ratios from the financial statements like the balance sheet, cash flows, and profit and loss accounts and hence the interpretation of the study model. The results of the analysis were presented in tables, percentages and graphs. Multiple regression analysis between variables was also done which showed that the variables under study were significant in explaining the relationship between the mergers and acquisitions on the profitability of commercial banks. The study recommends that institutions having weak capital base consolidate to create synergies so as to enjoy economies of scale as this will improve their profitability instead of going public by listing on the Nairobi Stock Exchange as this may be an expensive venture as it requires much funds for listing and that those firms facing constraints on the market should consolidate their energies by resorting to merger/acquisition so as to expand their profitability as the merger/acquisition is not just for the best interest of the managers but also shareholders as it leads to an increase in shareholders' wealth as opposed to each independent financial institution. The study recommended further studies to be done on the effect of mergers and acquisitions on the performance of other sectors like insurance, manufacturing and ICT