Moderating Effect of Bank Size on the Relationship Between Non-Interest Income and Insolvency Risk Of Commercial Banks in Kenya
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Date
2022
Authors
Emongor, Elizabeth Masakhwe
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Ensuring commercial banks remain resilient is critical to the success and growth of any economy as they allocate resources toward productive activities. Hence, the general objective of the study was to examine the moderating effect of bank size on the relationship between non-interest income and insolvency risk of commercial banks in Kenya. The specific objectives were to determine the effect of fees and commissions on loan income, dividend income, foreign exchange trading income, and transaction fees income on insolvency risk. Bank size was used as a moderating variable. The study was anchored on agency theory, modern portfolio theory, financial intermediation theory, stakeholder theory and economies of scale theory. The study period was between 2012 and 2019. The study conducted a census in which all 40 banks were included in the study. Secondary data from audited financial statements, published annual reports and supervisory reports published by CBK for the period between 2012 and 2019 was used in the study. The analysis performed included descriptive statistics (mean, standard deviation, minimum and maximum) and inferential statistics (correlation and panel multiple regression analysis). The correlation results showed that fees and commissions on loans income, dividend income, foreign exchange trading income, and transaction fee income are positively and significantly associated with the Z-score. The regression results showed that fees and commission income from loans was positively and significantly related to the Z-score of commercial banks in Kenya. Additionally, dividend income was found to be positively and significantly related to the Z-score of commercial banks in Kenya. Furthermore, foreign exchange trading income was found to be positively and significantly related to the Z-score of commercial banks in Kenya. Lastly, transaction fee income was found to be positively and significantly related to the Z-score of commercial banks in Kenya. Lastly, there is a significant effect of the interaction term between fees and commissions on loans income and bank size (log assets), dividend income and bank size (log assets), foreign exchange trading income and bank size (log assets), transaction income and bank size (log assets). The coefficient of determination (R-squared) increased when bank size interacted with non-interest income (fees and commissions on loans income, dividend income, foreign exchange trading income, and transaction income). The study concluded that fees and commissions on loans income, dividend income, foreign exchange trading income, and transaction fee income are positively and significantly related to the Z-score. Bank size moderates the relationship between non-interest income and the insolvency risk of commercial banks in Kenya. The study recommended that commercial banks need to review transaction rates from time to time to ensure that they derive maximum income from loans. Further, banks need to participate in the securities market by trading in shares and other investment vehicles to expand their revenue base. Banks can diversify their investment options and focus on foreign exchange trading income since it increases solvency. The research recommended that future studies be conducted to examine the effect of interest rates, technology, capital adequacy, and income diversification on the insolvency risk of commercial banks in Kenya. Furthermore, studies can be conducted on other financial institutions, such as microfinance institutions. This will unearth more research gaps for future studies
Description
A Thesis Submitted to the School Of Business in Partial Fulfillment of the Requirements for The Award of the Degree of Master of Science (Finance) of Kenyatta University.
Keywords
Moderating Effect, Bank Size, Relationship Between, Non-Interest Income, Insolvency Risk, Commercial Banks, Kenya