Financial inclusion and stability of commercial banks in Kenya
Musau, Salome Mwongeli
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Commercial banks remain the dominant channel of financial intermediation in emerging market economies such as Kenya. After the global financial crisis of 2007-2009, policy makers, regulators and financial institutions heavily invested in reforms aimed at improving financial stability. At the same time, there has been global commitment to promoting greater financial inclusion. Consequently, commercial banks have addressed financial inclusion by designing new services and products targeting unbankable customers. However, despite these initiatives, some commercial banks have incurred stability related challenges in Kenya and thus some were put under receivership and others closed. It is therefore, important for financial institutions to understand the interlinkages in advancing financial inclusion and financial stability. Therefore, this study set out to establish the effect of bank availability, bank accessibility and bank usage on stability of commercial banks in Kenya. The study further sought to determine the moderating effect of bank operating environment, and establish the mediating effect of bank competitiveness on the relationship between financial inclusion and financial stability of commercial banks in Kenya. The study was anchored on financial intermediation theory supported by finance growth theory, asymmetry information theory and competitive-stability theory. Positivism philosophy, longitudinal and explanatory non–experimental research designs were used. The target population was all the 43 commercial banks in Kenya. The study used secondary data collected from annual reports of the Central Bank of Kenya (CBK); commercial banks audited published financial statements and annual data from the Kenta National Bureau of Statistics (KNBS) for the period between2007 and 2015. Data was analyzed using descriptive statistics and panel multiple regression analysis. The results indicated that bank availability had a statistically significant effect on bank stability. Bank accessibility also had a significant effect on bank stability. However, it was found to have insignificant effect on liquidity risk. In addition, bank usage was also found to have a significant effect on bank stability. On operating environment, inflation rate was found to moderate the relationship between financial inclusion and bank stability. The Gross Domestic Product growth rate moderated the relationship between financial inclusion and bank stability. Nevertheless, there was no moderation effect for insolvency risk which is a measure of stability. Bank competitiveness was found to partially mediate the relationship between financial inclusion and bank stability. However, there was no mediation for insolvency risk. The study thus concluded that financial inclusion influences stability. Further, increase in GDP growth rate encourages more financial inclusion. Moreover, banks that have developed competitive strategies are likely to be more stable. The study, therefore, recommends that managers of commercial banks should design strategies that enhance financial inclusion to many customers, develop strong and persuasive promotion of their products and provide financial literacy to the customers. This will enable the customers to appreciate and use the products and assist the banks to remain competitive in the market. The regulator should strengthen the legal and regulatory framework to ensure that banks remain stable while accommodating financial inclusion. Bank managers should lobby the CBK to maintain a favorable environment hence form an all-inclusive and stable financial sector over time.