Unsystematic Risks and Commercial Bank’s Propensity to Fail in Kenya
Oseki, Owino Dennis
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The most recently reported bank failures in Kenya were attributed to the banks’ unsystematic factors e.g. insider lending. What followed were qualitative researches focused on the failed banks and a few quantitative studies based on CAMEL variables. The former lacked transferability while the latter papers ignored other key factors which are introduced here. So, the current paper sort to investigate quantitatively the effect of a bank’s unsystematic factors on its propensity to fail. Two broad unsystematic factors of related party transactions and over-expansion were identified. These were further separated into four variables hence the four specific objectives which were: to investigate the effect of related party lending on commercial bank’s propensity to fail in Kenya; to examine how a bank’s transactions with its affiliates influences its propensity to fail in Kenya; to explore the effect of branch expansion on commercial bank’s propensity to fail in Kenya and; to examine the relationship between credit expansion and commercial bank’s propensity to fail in Kenya. Three theories formed the basis of analysis: agency theory/conflict of interest hypothesis, efficient transaction hypothesis and balanced portfolio theory. The study employed causal research design. Besides, it used secondary data collected from a sample of 30 banks selected on the basis of accessible annual statements from 2013 to 2018. Collection was from the Central Bank’s Annual Supervision Reports and individual bank’s financial statements (on their websites) manually, using a carefully designed data collection form. Analysis was mainly by logit multivariate regression analysis. In doing this, Altman’s z-score formed the basis of creating the study’s binary dependent variable bank failure by helping classify a bank as either failed or otherwise. All analysis processes were with the help of Stata statistical software. To ensure compliance with ethical research standards; only publicly available data were used, solely for the research with no intention of distribution and, sources dully acknowledged. The study found related party lending, affiliated transactions and loan expansion to negatively affect a Kenyan bank’s propensity to fail. These were at 1% significant level with the respective coefficients of -161.4429 (p-value=0.007), -135.9442 (0.003), and -104.6996 (p-value=0.000) for related party lending, affiliated transactions and loan expansion. No significant relationship was found between probability of failure and branch expansion (p-value 0.796). Based on these, the study recommended continued vigilant supervision of commercials banks by CBK to continue avoiding any harmful effects of related party transactions and aggressive expansion.