Effect of Camel Variables on Financial Stability: A Dynamic Panel Analysis of Commercial Banks in Kenya
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Date
2020
Authors
Wamalwa, Nathan
Mungai, John
Makori, Daniel
Journal Title
Journal ISSN
Volume Title
Publisher
International Knowledge Sharing Platform
Abstract
A stable banking sector is significant in ensuring economic growth as well as sound, efficient and stable financial
system. However, the banking sector in Kenya has been considered fragile and this is evident from the increasing
trend of non-performing loans, fluctuating deposit trend of some commercial banks and fluctuations of foreign
liabilities in commercial banks in Kenya, which is associated with financial stability. Furthermore the collapsing
of some commercial banks and some being put under receivership is of great concern to the financial stability of
the commercial banks in Kenya. The general objective of the study was to establish the effect of CAMEL variables
on financial stability of commercial banks in Kenya. The specific objectives of the study were to determine the
effect of operational efficiency, capital adequacy, bank liquidity, profitability and asset quality on financial stability
of commercial banks in Kenya. The study was carried out in 17 fragile commercial banks in Kenya between 2011
and 2018. Generalized Method of Moments (GMM) model guided by dynamic panel regression results revealed
that operating efficiency had a statistically significant positive effect on financial stability (β= 0.3104109, p=0.037)
of commercial banks in Kenya. The study also established that capital adequacy had a statistically significant
negative effect on financial stability (β= -0.1560403, p=0.050) of commercial banks in Kenya. The study further
revealed that bank liquidity had a statistically insignificant negative effect on financial stability (β= -0.0073553,
p=0.881) of commercial bank in Kenya. In addition, profitability had a statistically significant negative effect on
financial stability (β= -0.1064231, p= 0.036). Finally, the study revealed that asset quality had a statistically
significant positive effect on financial stability (β= 0.0987029, p= 0.032). Based on these findings, the study
recommends for mergers and acquisition among the fragile commercial banks as per the fragility index, adoption
of internal economics of scale, limits on insider loans to be established and credit to borrowers should not exceed
15% of the capital. This would ensure a sound and vibrant economy towards achieving the Vision 2030 that
advocates for well-functioning, efficient and stable financial system.
Description
A research article published in Research Journal of Finance and Accounting
Keywords
Camel Variables, Firm characteristics, Financial Stability, Dynamic Panel Regression
Citation
Research Journal of Finance and Accounting. Vol.11, No.18, 2020