What drives banking sector performance in Kenya?

The study analyses the driving factors behind the impressive banking sector performance in Kenya in the last 13 years ? 1997-2011. The paper makes use of structure conduct (SCP) literature that postulates that structure and efficiency play a role in determining performance. Data envelopment analysis (DEA) is used to derive scale and technical efficiency scores. The efficiency scores are then incorporated into the main equation to test the four hypotheses in SCP literature. The results suggest that the source of superior performance in the Kenyan banking sector is structure/collusive power and not efficiency hence supporting SCP hypothesis. The efficiency hypothesis (ESH) is rejected as technical and scale efficiency are found to be insignificant. Policy recommendations propose that a decrease in concentration/relative market powers makes market more competitive and redistributes profitability shares more evenly. Further, the study recommends that increasing efficiency in the scale of operation would reduce concentration thus improve competition.