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Empirical Literature Review

 A study done
on Macroeconomic determinants of Bank profitability by Sufian and Kamarudin
(2012) highlighted  bank specific
characteristics and macroeconomic factors affecting profitability in the
Bangladesh’s banking sector over the period 2000 to 2010 .The study focused on
a sample size  of 31 commercial banks .
The determining factors were identified using multiple regression analysis. The
results showed that macroeconomic determinants significantly influenced the profitability
of banks. The relationship between economic growth and bank performance was
seen to be negative and significant while the coefficient of inflation was
found to be significant and positive.

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Rao & Lakew (2012) carried out a study to determine
the key factors affecting profitability of commercial banks operating in
Ethiopia using panel data set of banks over a 10 year period between1999-2009.
The external factors brought to light were linked to the industry and the
macroeconomic influences within which the banks operate. The result of the
study indicated that external factors had a statistically insignificant effect.
Inflation was found to be statistically insignificant but it is positively
related to bank profitability. Real GDP growth rate effect was found to be
statistically insignificant though with a positive sign.

 A study done
by Haron (2004 was set to investigate the determinants of Islamic bank
profitability and found that CPI was positively related to all profitability
measures, their relationship was not statistically significant. A study by Dietrich
(2009) also analyzed the profitability of commercial banks in
Switzerland over 8 years, the time period from 1999 to 2006. Their sample size
was made up of 453 banks. Besides bank specific characteristics, they included
a set of macroeconomic and industry-specific variables into their regression
analyses. Their results showed that the GDP growth rate affects bank profitability
in Switzerland in a positive way, with the coefficients being significant at
the 5% level.

Athanasoglou et al.(2006) carried out a study on  the how bank-specific, industry related and
macroeconomic determinants affect a bank’s profitability, using an unbalanced
panel dataset of South Eastern European (SEE) credit institutions as the sample
of study for 5 years over the period 1998-2002. The estimation results indicated
that the picture regarding the macroeconomic determinants was mixed. Inflation
positively and significantly affects profitability.

Ongore (2013) Studied moderating effect of ownership
structure on bank performance by use of linear multiple regression model and
Generalized Least Square on panel data of commercial banks in Kenya to estimate
the parameters. The findings showed that GDP had an insignificant -0.046
correlation coefficient with Return on Asset, inflation had significant
negative relationship with financial performance of commercial banks in Kenya.
It had 0.055 coefficients of parameters with Return on Asset.

Constantinos & Sofoklis (2009) carried out a
study that focused on investigating the effects of bank-specific and
macroeconomic determinants of bank profitability. They used a panel data
approach and a sample size of six Greek banks. The inflation rate appeared to have
a positive but insignificant or little effect on bank profitability. Other
macroeconomic variables investigated, such as Gross Domestic Product, proved to
have a highly insignificant effect.

Otuori (2013) in his study on the Influence of
exchange rate determinants on the performance of commercial banks in Kenya
focused to shed light on the relationship between inflation rate and bank
profitability in Kenya. The results of the study concluded that inflation rate
had a negative and significant effect on bank profitability. This effect was
significant at 5% level of confidence.

Ramadan et al, (2011) set out to investigate the
nature of the relationship between the profitability of banks and the
characteristics of internal and external factors using a panel data set of
banks in Jordan. He derived 100 observations from the sample size of 10 banks
over the period 2001-2010. Results associated with the macro-economic
determinants: inflation and economic growth (RGDP) showed a positive
insignificant impact on return on assets.

Flamini et al,(2009) did a  study on the determinants of commercial bank
profitability in Sub-Saharan Africa  and established
that Macroeconomic variables significantly affect bank profitability in Africa.
To be more specific, inflation had a positive effect on bank profits; output
growth had a significant positive impact on bank profitability. .

Summary and Gap in Literature From the studies
reviewed, it is evident that several research works on the factors affecting
the profitability of banks in various parts of the world have been carried out.
However, the short coming of these reviews is that the effect of macroeconomic
factors on bank profitability is inconclusive with some researcher finding
insignificant effect while others establishing significant influence.

This study bridges this gap by use of annual data
involving 5 commercial banks in Kenya to establish bank specific
characteristics of the effect of macroeconomic factors on bank profitability in
Kenya with these banks in focus.  

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