Effect of Banking Sectorial Factors on Financial Stability of Commercial Banks In Kenya

Abstract

In recent years, the stability of commercial banks in a number of countries across the globe has not been that robust with those in Portugal recording cumulative decline of about 26.6% in assets since 2010. In the Sub-Saharan Africa (SSA) region, and Ghana in particular, commercial banks have continued to record higher figures for non-performing loans (NPLs), ranging from as high as 13%. Locally, the ratio of NPLs to gross loans for commercial banks in Kenya has continued to be on an upward trend, rising to 9.5 % in March 2017 from 6.8 % in March 2016. This is has also been the case for the listed commercial banks at the Nairobi Securities Exchange (NSE). This might be attributed to a number of factors including the banking sectorial factors. However, existing empirical studies including those based on data from commercial banks in Kenya are mixed at best on their findings on the effects of these factors on bank stability. This is despite them being critical in the formulation of effective policies essential to bank stability. Hence, the purpose of this study was to assess the effect of banking sectorial factors on financial stability of commercial banks in Kenya. The specific objectives were to; establish the effect of bank size on financial stability of commercial banks listed at the NSE, determine the effect of bank concentration on financial stability of commercial banks listed at the NSE and evaluate the effect of nation-wide branching on financial stability of commercial banks listed at the NSE. The study was anchored on the too big to fail hypothesis and adopted a correlation research design. Secondary balanced panel data sourced from the annual reports of all the 10 commercial banks listed at the NSE was used. The study spanned over a 5 year period as from 2013 to 2017, yielding 50 data points. Multiple regression was done to achieve the study objectives. In the regression analysis, the coefficient of bank size was found to be -7.132958 with a p-value=0.0391 meaning that bank size has a significant negative effect on the stability of commercial banks listed at the NSE. The coefficient of bank concentration was found to be -0.022892 with a p-value=0.4637 meaning that market concentration has a negative but insignificant effect on the stability of commercial banks listed at the NSE. Nation-wide branching was found to have a coefficient of 6.016090 with a p-value=0.4659 meaning that nation-wide branching has a positive but insignificant effect on the stability of the listed commercial banks at the NSE. Further, loan portfolio/risk was found to have a coefficient of 3.453852 with a p-value=0.6934 meaning that it has a positive but insignificant effect on the stability of commercial banks listed at the NSE. The conclusions of the study are that bank size has a significant negative effect on financial stability of commercial banks listed at the NSE; bank concentration has a negative but insignificant effect on the stability of commercial banks listed at the NSE; nation-wide branching and loan portfolio/risk have a positive but insignificant effects on financial stability of commercial banks listed at the NSE. The study therefore recommends that effective policies on bank size should be formulated by the Central Bank of Kenya (CBK) to ensure sustained stability of the commercial banks listed at the NSE and the country’s banking sector at large.