EFFECT OF RATIO ANALYSIS ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN RWANDA. A CASE OF BANK OF KIGALI PRIVATE LIMITED COMPANY
Abstract
Commercial banks have continued using various financial models for determining ratio analysis. However, commercial banks have not identified all the factors influencing financial performance and to which extent they influence financial performance of commercial banks in Rwanda. This study focused on the effect of ratio analysis on financial performance of commercial banks in Rwanda. A case of bank of Kigali PLC (2018-2021). Specifically, the study sought to achieve the following objectives; whether liquidity ratios has an effect on financial performance of commercial banks in Rwanda, to examine the extent to which operational efficiency ratios has an effect on financial performance of commercial banks in Rwanda and to establish the extent to which asset quality ratios affects the performance of commercial banks in Rwanda. The study adopted a descriptive research design where a census approach was carried out due to the small size of the units of analysis. Secondary data was used. Panel data was analyzed using SPSS software version 21 or regression analysis and model specification tests. Frequency tables were used to present the findings of the study. Ratio analysis factors were regressed on financial performance using panel regression models. The study revealed a significant relationship between liquidity, operational efficiency and asset quality on financial performance with operational efficiency being the most significant determinant of ratio analysis on financial performance of commercial banks in Rwanda. The study revealed that liquidity and ROA are positively but not significantly correlated (r=0.005) at 5% significance level. Further, results showed that efficiency and ROA are positively and significantly correlated (r=0.357**) at 5 % significance level. This implies that both efficiency and ROA change in the same direction. Asset quality Ratios had a significant negative relationship with ROA (r=- 0.479**) at 5 % significance level. From the findings as represented by the adjusted R2, the independent variables that were studied explained 52.5% of the variations in ROA in Bank of Kigali. This therefore means the three variables contributed 52.5% of the variations in ROA In Bank of Kigali whereas other factors not researched contribute 47.5%. Regression results revealed that liquidity ratio was positively but not significantly related with ROA of Bank of Kigali (β=0.014, p=0.794). The outcomes further show that efficiency was positively and significantly related with ROA of Bank of Kigali (β=0.006, p=0.001). Asset Quality Ratios exhibited a negative and significant effect on ROA of banks (β=-.005, p=0.000). The study recommended that managers and regulatory bodies should concentrate on how to improve financial performance of commercial banks and how to put proper controls to mitigate the effects of financial distress factors on financial performance. Regulatory bodies should ensure that there is routine revision of their policies for the purpose of ensuring a level playing field for all commercial banks regardless of their size. Further, constant monitoring by regulatory bodies should be in place. Supervisors and heads of business banks ought to likewise deal with working on their productivity and decreasing their credit risk in a bid to upgrade their exhibition and to stay cutthroat in the steadily changing climate.
Keywords: Liquidity Ratios, Efficiency Ratios, Asset quality Ratios, Financial performance, Bank of Kigali
CITATION: Kalisa, A., & Twesigye, D. (2022). Effect of ratio analysis on financial performance of commercial banks in Rwanda. A case of bank of Kigali Private Limited Company. The Strategic Journal of Business & Change Management, 9 (4), 1084 – 1098.
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DOI: http://dx.doi.org/10.61426/sjbcm.v9i4.2470
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