International Financial Reporting Standard 9 and Performance of Commercial Banks in Kenya
Loading...
Date
2025-09
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Despite the implementation of International Financial Reporting Standard 9 (IFRS 9) aimed at strengthening bank financial performance through robust credit risk management and forward-looking loan loss provisioning, conflicting evidence exists regarding its actual impact on commercial bank performance. Since IFRS 9's global implementation in 2018, studies have produced mixed results, with some indicating adverse effects on financial performance due to early recognition of expected credit loss provisions, while others suggest positive outcomes. In Kenya's context specifically, the banking sector has experienced continued consolidation and performance disparities across different bank tiers, raising questions about IFRS 9's effectiveness in achieving its intended objectives. Commercial banks serve as key intermediaries in resource allocation, facilitating fund flows from depositors to investors. Following the 2007-2008 financial crisis, the International Accounting Standards Board introduced IFRS 9 in 2014 to replace IAS 39, establishing a forward-looking expected credit loss framework designed to enhance financial stability and transparency. The purpose of this research was to analyze the influence of IFRS 9 on the financial performance of commercial banks in Kenya. The specific objectives examined the effects of loan loss provisioning, credit risk management, and capital adequacy on bank performance under the IFRS 9 framework, with bank competition tested as a moderating variable. The study was grounded in Credit Risk Theory, Asymmetric Information Theory, Agency Theory, Basel Capital Adequacy Framework, and Structure-Conduct-Performance Theory. A positivist philosophy and longitudinal research design were adopted, utilizing secondary panel data from all 39 commercial banks in Kenya over the period 2018-2022. Data was obtained from audited financial statements and Central Bank of Kenya supervision reports. Descriptive statistics and panel regression analysis were employed for data analysis, with comprehensive diagnostic tests conducted to ensure model validity. The findings revealed positive significant effects of loan loss provisioning (β = 0.402, p < 0.001), credit risk management (β = 0.737, p < 0.001), and capital adequacy (β = 0.188, p < 0.05) on bank performance measured by return on assets. Bank competition, measured through market share concentration, was found to significantly moderate these relationships, with the moderation model explaining 45.71% of performance variance compared to 40.32% in the direct effects model. The study recommends that bank managers enhance loan loss provisioning practices as a strategic tool rather than viewing provisions as performance constraints, maintain adequate capital buffers to support regulatory compliance and lending operations, and pursue market share growth strategies to leverage competitive advantages under IFRS 9. These findings contribute to the understanding of how international accounting standards can create competitive advantages when properly implemented in emerging market banking sectors.
Description
A Thesis Submitted to the School of Business, Economics and Tourism in Partial Fulfilment of the Requirements for the Award of Master of Science Degree in Finance of Kenyatta University, September 2025.
Supervisor
1. Dr. Fredrick Warui
2. Dr. Salome Musau