Abstract: Commercial banks are indispensable drivers of economic expansion which is a fundamental pillar of any country by facilitating investment, job creation, promote financial inclusion, providing loans for expansion and operation, with the banking sector being the biggest contributor yet it faces numerous challenges both globally and locally. This study assessed how macroeconomic variables had an effect on profitability of Kenya’s Tier 3 commercial banks. The study specifically examined inflation, exchange rate, money supply and interest rate on profitability of these banks. The study employed interest rate parity, international fishers’ effect, purchasing power parity, profit maximization theory and quantitative theory of money was considered. Panel regression model technique was adopted to analyze twenty-two Tier 3 commercial banks for the period 2019 to 2025 based on the census approach. The secondary data sources which included the official audited financial reports of these banks were used. The measure of profitability was return on assets. Quantitative data was analyzed using descriptive statistics such as mean, mode, standard deviation and skewedness. Inferential statistics included regression analysis, correlation analysis and analysis of variance. The secondary data was processed using Stata and presented using table and figures. Diagnostic tests were conducted through, normality test, autocorrelation test, multicollinearity, heteroscedasticity, and Hausman’s test. Ethical consideration was used in the whole process. The study established that the interest rate, inflation rate, exchange rate, money supply and profitability of these banks were significantly related. The interest rates were seen to have presented a substantial significant profitability improvement of these banks as they determined their net interest revenue earned on loans and interest paid on deposits. The inflation rate has a significant effect on banks’ profitability since it affects their operating expenses, loan repayment conduct, and interest margin. The exchange rate variations present a significant effect on bank profitability because a stronger Kenyan shilling compared to main currencies like the US dollar could minimize the expenses incurred on imports and reduce the worth of foreign-denominated liability, thus raising profit margins. The money supply had contributed to a considerable profitability improvement of these banks due to interest rates, liquidity, and credit accessibility. The identified study recommendations are that the banks can put more emphasis on strategies influenced by interest rates like loan portfolio optimization through giving competitive but gainful interest rates. The banks should focus much on asset base diversification to contain inflation-indexed tools like inflation-related bonds and treasury bills, to alleviate the effect of increasing inflation rate on their interest earnings. The banks can implement active currency hedging policies to alleviate the effect of exchange rate variations on their foreign currency-denominated properties and liabilities. The banks can strategically manage their loan portfolios to exploit on the effect caused by money supply which could affects interest rates and credit request.
Keywords: Interest Rate, exchange rate, money supply and interest rate, Profitability.
Title: MACROECONOMIC VARIABLES AND PROFITABILITY OF TIER III COMMERCIAL BANK IN KENYA
Author: Maureen Chebet Rotich, Dr. Moses Odhiambo Aluoch
International Journal of Social Science and Humanities Research
ISSN 2348-3156 (Print), ISSN 2348-3164 (online)
Vol. 14, Issue 3, July 2026 - September 2026
Page No: 280-291
Research Publish Journals
Website: www.researchpublish.com
Published Date: 02-September-2026
