APPLICATION OF EDWARD ALTMAN’S Z SCORE MODEL ON MEASURING FINANCIAL HEALTH OF COMMERCIAL BANKS IN KENYA
Abstract
The objective of this paper was to examine the financial health of banks listed and also not listed in the Nairobi stock Exchange, Kenya using the Altman Z score model of 2005.The CBK have the regulatory mandate to keep on check the financial health of banks considering that the Kenyan economy largely depends on banks. Following the many bank failures in Kenya, the CBK and the Kenya Bankers association have been pushing for improvement including transparency on commercial banks. Ever since the 2008 financial crisis, financial healths of banks have been a concern to corporate managers and other stakeholders. This study therefore applies Altman Z score, a multivariant financial analysis model to gauge the financial health of banks in Kenya. The ratios that form the model were the independent variables and they included Working capital to total assets and Retained earnings to total assets. Studies on applicability of Z score model appear rear/scanty especially on financial institutions and mainly focused on validity and effectiveness. This study used survey descriptive research design. The target population was the commercial banks in Kenya. The secondary data was extracted from audited annual reports and financial statements of banks’ respective websites and CBK for a period between 2010 to 2015. The annual financial statements included the statement of comprehensive income and statement of financial position. The collected data was analyzed using advanced excel program. In the analysis Multivariate Discriminant Statistical techniques as used by Altman 2005 was applied. Results indicated that during the period under study high percentage of Kenyan banks were on grey zone. Conclusions were made that Altman model was an average tool which can only be relied alongside other measure.
Key Words: Working, Retained Earnings, Assets, Liabilities
Full Text:
PDFReferences
Agha, H. (2014) Impact of working capital management on Profitability. European Scientific Journal.
Akindele, J. & Odusina, O. (2015) Working capital Management and firm profitability: Evidence from Nigeria Quoted companies. Journal of Finance and Accounting.
Alexia, P. (2008), Altmans Z score Model and prediction of Business failures, International journal of monetary Economics &Finance volume 1.Number 4.
Al-Najjar, B., & Belghitar, Y. (2011). Corporate cash holdings and dividend payment: Evidence from simultaneous analysis. Managerial and decision Economics, 32(4), 231-241.
Altman, E. (2003)Financial ratios, Discriminant Analysis &Predictor of Corporate Bankruptcy, Journal of Finance,23(4)589-610.
Amah, K. Ogbonnaya, A. and Ken, N. C.(2016) Capital Structure Composition and Financial Performance of Firms in the Brewery Industry: Evidence from Nigeria. Research Journal of Finance and Accounting ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.7, No.16, 2016
Aziz, M.& Dar, H.(2006).Predicting corporate financial distress. Where we stand? Corporate governance. The International Journal of Business in society, 6(1) 18-33.
Awan,A. G., & Amin, M. S. (2014). Determinants of capital Structure. European Journal of Accounting Auditing and Finance Research, 2(9), 22–41.
Babatunde, R.O., Adenuga, A. H., Olagunju, F.I., Oladoja, A.O. (2014): Effect of road infrastructure on farm production in Oyo state, Nigeria. Ethiopian Journal of Environmental Studies and Management 7(2):197-201.
Ball, R. (2013). Accounting Informs Investors and Earnings Management is Rife: Two
Questionable Beliefs. Accounting Horizons, 27(4), 847–53
Burkhart, J.H., &Wheek,J.C (2013).Examining Financial performance Indicators for acute care Hospitals. Journals of Health care Finance, 39(3) 1-13
Brigham, E.F.and Ehrhardt, M.C.2010.Financial Management Theory &Practice.13th edition, South Western. Engage hearing Mason, OH, ISBN: 1439078106, pp1184
Bryman, A. (2008).Social Research Methods: Oxford University Press.
Campbell, J.Y.Hischer,J.D.,&Szikgyi,J.(2011).Predicting financial distress and performance of distressed stocks. Journal of investment Management
Cheluiget, J.K. (2014), Determinants of Financial Distress in Insurance Companies in Kenya. Prime Journal of Business Administration and Management (BAM) 4(1), 1319-1328.
Chieng, J. R. (2013).Verifying the Validity of Altman’s Z Score as a Predictor of Bank Failures in the case of the Euro zone. National college of Ireland, Ireland.
Clausen, J. (2009 “Accounting Financial Statements analysis in Accounting: Liquidity Ratio Analysis Balance Sheet assets and Liabilities.”Journal of Financial Statements.
Cooper, D.R., & Schindler, P.S. (2011). Business Research Methods, 11th, edition. McGraw-Hill Publishing, Co. Ltd. New Delhi-India.
Dang, Uyen. (2011) .The CAMEL Rating System in Banking Supervision: A Case Study of Arcada University of Applied Sciences, International Business.
Deakan J.R(1972).A Discriminant analysis of predictors of failure, Journal of Accounting research,10(1),167-179
Ehiedu, V. C. (2014). The Impact of Liquidity on Profitability of Some Selected Companies: The Financial Statement Analysis (FSA) Approach. Research Journal of Finance and Accounting, 5(5), 81-90.
Fama, E. F., & French, K. R. (2005). Financing decisions: Who Issues Stock? Journal of Financial Economics, 76, 549-582.
Falope, O.I., Ajilore, O.T. 2009. Working capital management and corporate profitability: evidence from panel data analysis of selected quoted companies in Nigeria. Research Journal of Business Management, 3: 73-84.
Gnyana, R. B.(2015).Prediction of financial Distress using Altman Z score ; Indian Journal Applied Research vol.5
Horkan,L.(2014).Are Retained Earnings part of Stockholders Equity? www.com.Retrieved 13/8/2016
Ihsan, I.R., Ahmed, J. S., Kazuri, N. I, Muhammad, S. L. (2015) Financial Performance analysis of Pakistan Banking Sector using Altman score model of corporate Bankruptcy. Applied research journal vol.1.issue 1 pp 33-40.
Imad Z.R. (2013). Debt-Performance Relation. Evidence from Jordan International Journal of Academic Research in Accounting, Finance and Management Sciences, Vol. 3 (1), pp. 323–331
Iyer, R.,Peydro,J. L.( 2011) Interbank contagion at work: Evidence from a natural experiment, Review of Financial Studies24, 1337– 1377.
Jasienei, M., Jonas, M., Filomena, J. and Grazina, K. (2012). Bank Liquidity Risk: Analysis and
Estimates.Business Management and Education, 10(2), 186-204.
Johanson,T.& Kumbaro,J. (2011).Predicting Corporate Default. An assessment of the Z sore Model on the U.S. Market 2007-2010.
Kannadasan, A. (2007),’Measuring Financial Health of a Public Limited company using Z score Model- a case study, The management Accountant.
Kanwal, I. K. (2012). Effect of Dividends on Stock Prices- A Case of Chemical and Pharmaceutical Industry of Pakistan. Management, 2(5), 141-48.
Kasilingam D.G.(2012).Profitability and Solvency analysis of a manufacturing company using dupot and Altman model.
Kayhan,A.(2007).Managerial discretion and the capital structure dynamics, Working papers Lousiana. State University, Baton Rong.
Khan, A. B., & Zulfiqar, A. S. (2012). The Impact of Retained and Distributed Earnings on Future Profitability and Stock Returns in Pakistan. International Research Journal of Finance and Economics, 121-32.
Khrawish, H.A. (2011) Determinants of Commercial Banks Performance: Evidence from Jordan. International Research Journal of Finance and Economics. Zarqa University, 5(5), 19-45.
Kim, B., & Suh, J.(2010).Retained Earnings and Capital Structure, http://media.csmfo.org/wp-content/uploads/2010.
Kingsley, O. A.,2011, Corporate failure Predictions: Some Empirical Evidence from Listed Firms in Ghana.USA.Business Review,ISSN 1537-1514.Vol.10 No.1,32-41.
Kinivo, R.M. & Olweny, T.2014.Financial performance Analysis of Kenya’s SACCO sector using the Altman Z score model of corporate Bankruptcy. International journal of Business and Social sciences.5 (9).
Kumari, N. 2013.Evaluation of Financial Health of MMTC in India;Z score model. European Journal of Accounting and Auditing &Finance Research 1(1):36-43.
Lacey, A. (2010) The research process. In Gerrish K, Lacey A (Eds) T. Sixth edition. Wiley-Blackwell, Chichester.
Lavrakas,P.(2008) Encyclopedia of survey Research methods,Vol.1&2.sage publication, Los Angeles USA,
Lo, C.K.Y., Yeung, A.C.L., & Cheng, T.C.E (2011).The impact of environmental management systems of financial performance in fashion and textiles industries.International journal of production Economics, 135(2),561-567.
Margaritis, D. & Psillakim.P, (2010).Capital structure, Equity Ownership and Firm performance, Journal of Banking and Finance,34 pp.621-632.
Marshall, C. & Rossman, B. G.(1990) Designing Qualitative Research. Newbury Park CA: Sage Publications 1989 pg175
Mathuva, D. (2010).The influence of working capital Management components on corporate profitability; A survey Kenya listed firms. Research journal Business management; 1-11.
Menhet,S.and Edda,O. (2009).Relationship between efficiency level of working capital management and Return on Total Assets in Ise: International Journal of Business & Management vol.4 No.10.
Michael, C. E., O. I. I. (2014) Reserve revenue and financial performance in the Brewery Industry: Evidence from Nigeria. Journal of Applied Economics and Finance vol.1.No.2; Novemeber 2014
Mizan, A.N.K., Amin, M.R. &Rahman, T. (2011). “Bankruptcy Prediction by Using the Altman Z-score Model: An Investigation of the Pharmaceutical Industry in Bangladesh”, Bank Parikrama, 36(2-4): 33-56
Mo, Vazin, Ratiqal & P. (2012).Comparatitive Predictability of failure of financial Instituitons using Multiples Models. Investment Management & Financial Innovations vol,9 issue 2,2012.
Myers, S. C. (1984). The Capital Structure Puzzle. The Journal of Finance, 39(3), 574- 592.
Myers, S.& Majluf,N.(1984).Corporate Financing and Investment Decisions when firms have information that investors do not have. Journal of Financial Economics 13.187-221
Nawaz A., Ali R., & Naseem M. A. (2011). Relationship between Capital Structure and Firms Performance: A Case of Textile Sector in Pakistan. Global Business and Management Research, 3, 270-275.
Ncube,T. (2014).Predicting corporate Failure; Insights from the Financial sector in Zimbabwe. International Journal of Economics Commerce & Manangement united Kingdom. Vol II, issue II Nov.2014
Nimalathasan, B. & Brebete, V. (2010) Capital structure and its impact on profitability: A Study of listed manufacturing companies in Srilanka. Young Economists Journal/Revista Tinerilor Economists 8 (15)
Odipo,M.K & Sitati,A.(2008) Evaluation of applicability of Altman’s reviewed Model in prediction of financial Distress; A case of companies quoted in Nairobi Stock Exchange. International journal of finance &Accounting, 325-338
Ogula, P. (2005). Research Methods. Nairobi: CUEA Publications.
Orodho, J. (2003). Essentials of Educational and Social Sciences Research Method. Nairobi: Masola Publishers.
Oloo,O.(2011).Banking Survey Report. The best banks this decade 2001-2010.Think Business Limited.Kenya.
Oso, W.Y & Onen, D. (2009). Writing Research Proposal and Report. Nairobi: Jomo Kenyatta foundation.
Owalabi, S.A. & Inyang, M.E (2012), Determinants of Capital structure in Nigerian firms: A theoretical review of Canadian journal of Accounting & Finance (1)7-5
Pam,W.B (2013).Discriminant Analysis & Prediction of corporate Bankruptcy in the Banking sector of Nigeria, International journal of finance &Accounting,319-325.
Perinpanathan, R. (2014). Impact of financial leverage on financial performance: Special reference to John Keels Holdings Plc, Sri Lanka. Scientific Research Journal, 2(2), 15-20.
Ponraj, P. & Rajendran, G. (2012).Financial Strength as an indicator for measuring bank competitiveness: An Empirical evidence from Indian Banking Industry. Journal of Applied Economic sheicis, Summer 2012 Vol 7 issue 2.
Popescu, L., & Visinescu, S. (2009). A review of the capital structure theories. Annals of the University of Oradea, Economic Science series, vol. 18, p. 315-320.
Puwanenthian, P.(2011).Capital Structure and Financial Performance; Evidence from Selected Business companies Stock exchange Srilanka. Journal of Arts, Science and Commerce. E-ISSN 2229-4686:ISSN 2231-4172
Ramaratham,M.S.and Jayaraman, R.(2010) “A study on measuring the financial soundness of select firms with special reference to Indian Steel Industry- An Empirical view with Z score,.” Asian journal of Management Research, Vol.1.No.2,pp 724-735.
Ray,S.(2009).Assessing corporate Financial Distress in Automobile Industry in India: An Application of Altmans model. Research journal of Finance and Accounting 2(3),155-169.
Rehman, M. Anjum, U.N. (2013).Determination of Working Capital Management on Profitability in Pakistan. Asian Economic and Financial Review: Karachi
Said, R.M., & Tumin, N.H. (2011). Performance and Financial Ratios of Commercial Banks in Malaysia and China. International Review of Business Research Papers. Vol. 7. No. 2. March 2011. Pp. 157-169
Sangmi M., Tabbasan, N. (2010).Analyzing Financial performance of commercial banks in India. Application of CAMEL model. Pakistan Journal commercial social sciences.
Scot J.T 1981.The probability of Bankruptcy: A comparison of Empirical predictions and Theoretical models. Journal of Banking and Finance.
Sharma, A.K. & Kumar,S.(2011).Effect of Working capital on Firms Profitability. Global Business review, 12(1), 159-173.
Shisia, A., Sand , W., & Okibo W. B. (2014). An in depth analysis of the Altman’s failure prediction model on corporate financial distress in Uchumi supermarket in Kenya. European Journal of Business Management, 6(23). 27-41
Shyam, Sunder, L., & C. Myers, S. (1999). Testing static tradeoff against pecking order models of capital structure. Journal of Financial Economics, 51(2), 219-244.
Stepanyan A. (2014).Altman’s Z score in the Airline Business. Case study of Major U.S carriers. International journal of Advance in Management &Economics ISSN: 2278-3369.
Stephen, M., & Elvis, K. (2011). Influence of working capital management on firms’ profitability: A case study of SMEs in Kenya. International Business Management, 5, 279-286.
Sulphey M. M & Nisa S. (2013).The Analytical Implication of Altman’s z score Analysis of BSE listed Companies. Global journal of commerce &Management perspective
Suzane K.H., Kay A.H. and Larry W.H. 2010: A study of the Efficacy of Altman’s Z score to predict bankruptcy of Specialty Retail firm doing Business in contemporary times. Economics &Business Journal: Inquiries & Perspective Vol.3No.1 USA.
Syed Ibrahim, M. (2010). Performance Evaluation of Regional Rural Banks in India.
International Business Research - CCSE, Vol-3, No.4, October.
Tan, T.K. (2012) Financial Distress firm performance: Evidence from the Asian Financial Crisis. Journal of Accountancy &Finance, 11.5-6.
Thriumalasamy, R. (2013).Firm growth and Retained earnings behavior. A study on Indian firms. European journal of business and management,5(57),40-57.
Wang, Y.and Campell, M. (2010).Business Failure Prediction for Publicly listed companies in China. Journal of Business and Management 16,75-88.
Williams,N and Carol,J.,(2012).Euro Crisis Imperils recovering global economy, OECD warns Los Angeles Times.
Wright.T.C (2014) Difference of Profit and Retained earnings profit.htt//www.azcentral.com retrieved 13/08/2016
Zikimund, G. W., Babin, B.J., Cann, C.J & Griffin, M.2010.Business Research methods 8th edition. South Western, Cengage learning.
DOI: http://dx.doi.org/10.61426/sjbcm.v4i2.461
Refbacks
- There are currently no refbacks.
This work is licensed under a Creative Commons Attribution 3.0 License.
PAST ISSUES:
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.