Bank specific factors and risk taking among commercial banks in Kenya
Kavoya, Job Musyoka
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ABSTRACT Commercial banks’ role of intermediation between borrowers and lenders plays a critical role in money creation process. The taking of deposits and lending it to borrowers makes banking industry a special business. However, this unique banking characteristic exposes banks to risk-taking. Lending may lead to accumulation of risky loan portfolio that may eventually affect the stability of the whole banking industry. Banks performance can be measured using different key performance indicators that are unique to banking industry. The management of a bank can deliberately alter these performance indicators based on their intended goals and objectives. However, these bank specific factors can expose banks to increased risk taking. Available literature show that bank specific factors affect risk taking. However, how these factors affect risk-taking is contradictory. Some studies show that bank-specific factors positively affect risk-taking. This means that as commercial banks performance measures grow, risk-taking increases. Other studies have showed that bank specific factors negatively affect risk-taking. This means that as banks performance measures grow, commercial banks take less risks. Most recently, new study has shown that the relationship between bank specific factors and risk-taking is U-shaped, meaning that as bank performance measures grow, risk-taking starts to decline but after sometime, the growth in performance measures leads to growth in risk-taking. To provide empirical evidence that would ensure stability in the banking industry in Kenya, it was necessary to undertake this research to establish how bank specific factors contributed to risk taking among commercial banks in Kenya. The study examined the effect of credit growth on risk-taking among commercial banks in Kenya, the effect of bank size on risk-taking among commercial banks in Kenya, the effect of bank risk appetite on risk-taking among commercial banks in Kenya, and the effect of banks profitability on risk taking among commercial banks in Kenya. The study was done for period 2006 to 2013. The choice of 2006 as starting period for this study was based on Central Bank of Kenya’s risk management guidelines that were issued in August 2005.A descriptive research design was used in this research. The target population for this study was a census of all commercial banks operating in Kenya for the period 2006 to 2013. Commercial banks in Kenya are required as a regulatory measure to submit audited financial statements to Central Bank of Kenya. This study, therefore, used secondary data which was collected from each commercial bank. The analysis of data was done using both descriptive statistics and panel data regression analysis. Descriptive statistics including mean and standard deviation were done to give a summary of the variables while panel regression models were used in testing the hypothesis. The findings show that bank specific factors affect risk taking among commercial banks in Kenya. The study established that bank capital had a positive significant coefficient of 0.0006632 and probability of 0.000, credit growth had a positive significant effect on risk taking among commercial banks in Kenya with coefficient of 6.79468 and probability of 0.043. Bank risk appetite had a negative significant effect on risk taking among commercial banks in Kenya with a coefficient of -45.53013 and probability of 0.007. However, bank’s profitability and credit growth lagged two periods had probability of 0.127 and 0.161 respectively. Thus, profitability and credit growth lagged two periods did not significantly affect risk taking. This study, therefore, recommends effective determination of optimal bank size among commercial banks in Kenya reduce risk taking. Additionally, this study recommends that commercial banks need to reassess their assets quality and diversify from traditional banking activities to reduce risk taking.