FINANCIAL LEVERAGE AND PERFORMANCE OF COMMERCIAL BANKS IN KENYA: A CASE STUDY OF THE NATIONAL COMMERCIAL BANK OFAFRICA, NAIROBI

Abstract

Commercial banks' performance is largely determined by their financial leverage. This study investigated the effect of financial leverage on the performance of Kenya's NCBA Bank. It focused on credit risk management practices, the cost of debt, capital structure decisions, and interest rate volatility, all of which influenced the bank’s profitability, liquidity, and overall stability. The purpose of the study was to examine how credit risk management, cost of debt, capital structure, and interest rates affect financial performance. The research was anchored on three key financial theories: the Trade-Off Theory, the Pecking Order Theory, and the Agency Theory. A descriptive research design was adopted, and data were collected through a structured questionnaire administered to a sample of 148 employees, of which 136 responses were properly completed and analysed. Descriptive statistics showed that respondents generally agreed that credit risk management, cost of debt, and interest rate were key drivers of financial performance. Regression analysis revealed that credit risk management (β = 0.355, p = 0.001) and interest rate (β = 0.688, p = 0.028) had a significant positive influence on financial performance, while cost of debt (β = -0.479, p = 0.039) had a significant negative effect. Capital structure, however, had no statistically significant effect (β = 0.018, p = 0.959). The overall model was statistically significant (F = 5.675, p = 0.000) with an R-squared value of 0.148, indicating that the four independent variables explained 14.8% of the variation in financial performance at NCBA Bank. The study recommended that NCBA Bank strengthen its credit risk management frameworks, optimize the cost of borrowing through strategic debt sourcing, and enhance interest rate risk management to improve profitability. Although capital structure was not a significant predictor in this context, it was suggested that it be regularly reviewed to ensure financial stability. Future research was recommended to expand the study to include multiple banks for generalizability, consider additional financial and operational variables, adopt longitudinal designs, and possibly use mixed methods to uncover deeper insights into leverageperformance dynamics. These efforts would help build a broader and more nuanced understanding of financial performance in Kenya’s banking sector.