THE RELATIONSHIP BETWEEN SOLVENCY AND PROFITABILITY OF COMMERCIAL BANKS IN KENYA
Abstract
The significant role performed by commercial banks in country’s economic development depends entirely on their level of profitability. Low level of profitability hurts the economy and causes stakeholders to incur losses. This study sought to examine the relationship between solvency and profitability of commercial banks in Kenya. This research used secondary data from audited and published financial statements such as statement of financial position, income statement and statement of changes in equity. The target population was all the 43 commercial banks in Kenya. Census of all the 43 commercial banks in Kenya was used for this study whereby audited financial statements for the period 2011-2020 was analyzed. The study used descriptive research design as well as inferential and descriptive statistics to analyze data. The study revealed a p-value of 0.001 < 0.05 level of significance cut off point which was a strong evidence against null hypothesis (Ho), hence the null hypothesis was rejected. The regression analysis revealed that that 37.8% of variation in profitability can be explained by solvency while the remaining 62.2% is attributed to other factors outside the model. The study further revealed that total debt to total assets ratio has significant negative relationship with profitability while total debt to equity ratio has positively relationship with profitability of commercial banks in Kenya. The study recommends that the commercial banks regulating body (the central bank of Kenya) as well as the commercial banks management should formulate and implement policies which ensures that all banks operate within a minimum level of solvency.