Bank-Specific Characteristics and Financial Stability of Commercial Banks in Kenya

Abstract

The financial stability of the banking sector is an essential aspect of promoting performance within the industry and enhancing the growth of the economic sector. Within the period 2015-2016, some of the Tier II banks have been placed under receivership as well as Tier I bank coming under intense screening by the central bank due to their financial soundness. Despite this, there has been little examination of what is contributing to the extreme volatility in the stability of commercial banks. The current study sought to examine how bank-specific characteristics influence the financial stability of commercial banks in Kenya. The study specifically examined if there is any significant influence of capital adequacy, bank size, liquidity and management efficiency on the financial stability of commercial banks in Kenya. The study was grounded on both the agency and the efficiency theory. The research adopted a descriptive research design with the target population of the study being the 42 registered commercial banks in Kenya as of December 2017. The study adopted a census sampling of managing directors and finance managers within each of the 42 commercial banks. The study utilized both secondary and primary data with the latter being collected using a semi-structured questionnaire. Secondary data was collected from CBK annual reports, annual bank reports and peer-reviewed journals. The study further conducted a pilot test within 15% of the target population. The collected data was coded into SPSS 23 for descriptive and inferential analysis. Data analysis involved the use of statistical methods such as descriptive (means, standard deviation, frequencies, and percentages) and inferential statistics such as regression analysis, ANOVA and correlation. The analyzed data was presented using frequencies, tables percentages, and correlation coefficients. The research also ensured appropriate ethical considerations are observed in the course of the study. The research was able to obtain an 87% response rate. The study indicates that the bank-specific characteristics can determine 54.5% of variations in the stability of commercial banks. The research also shows a statistically significant relationship between bank size, management efficiency, liquidity and the stability of commercial banks. The findings are expected to help the central banks in realigning their prudential requirements to the prevailing economic environment and also design new punitive measures that will ensure commercial banks strictly adhere to regulatory requirements. The study concluded that holding an optimal loan portfolio will enhance financial performance and that commercial banks should leverage their market share, branch network, and strategic partnerships to expand their size and competitiveness. Recommendations were that new punitive measures be put in place to deter the management of commercial banks from risking the soundness of their institutions through engaging in fraudulent transactions.