Relationship between Firm Characteristics and Financial Stability of Tier Three Commercial Banks in Kenya
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Date
2023
Authors
Kamau, George Muhoho
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Tier three commercial banks play a vital role in any solid economy. Their role in
intermediation cannot be overemphasized. Due to this vital impact, there is a need to
ensure they are financially stable and assure their survival in the economy. The financial
economies around the world and the region, have suffered recent collapse occasioned
by financial instability. Kenya has not been spared by instances of tier three banks
failures. This has left many customers in disarray as to whether tier three banks will
safeguard their money thus leading to capital flight to other higher tiered banks.
Instability of tier three banks has been attributed to interest rate capping that was
introduced in 2016 and in some cases, heavy cost of operation and their size. This
indicates lack of a substantive approach in connection to their instability. Studies based
on other economies focusing on different financial stability measures, have been done
but cannot be generalized to the Kenyan context. This study was guided by Agency
Theory, Capital Buffer Theory, Efficiency Theory and Structure Conduct Performance
Hypothesis. The study adopted positivism philosophy, as well as an explanatory
research design via a census approach. Secondary data was collected from the websites
of the commercial banks over a period of seven years that is from year 2013 to year
2019. Data was analyzed using descriptive statistics, Pearson's Correlation analysis and
panel regression analysis. Hypotheses tests were performed at 0.05 level of significance.
Several key diagnostic tests were carried out including; autocorrelation,
multicollinearity, normality, heteroskedasticity, the Hausman model and the stationarity
tests. The data was regressed on the basis of direct effect and mediation effect. The
study found that capital adequacy and management efficiency are significantly related
with stability of tier three banks in Kenya at a p-value of 0.001 each. Bank size was
found not to be statistically related with stability of tier three banks in Kenya a P-value
of 0.191. The study also found that bank competitiveness is not significant to mediate
the relationship between firm characteristics and stability of tier three banks in Kenya at
a P-value of 0.026. The study concluded that adequate capital in a business and efficient
management policies are key to sustaining stability of tier three commercial banks and
therefore, the regulators and the management should ensure that policy guidance that
affect positive capital adequacy and corporate governance are emphasized. The study
also concluded bank size does not affect banks stability and therefore, a balance of
investments should be done focusing more other important factors other than bank size.
The study recommends that further studies on bank size, bank competitiveness and their
relationships with financial stability be carried out.
Description
A Thesis Submitted in Partial Fulfillment of the Requirements to the School of Business, Economics and Tourism for the Award of Degree of Master of Science (Finance) of Kenyatta University, May 2023.
Keywords
Relationship between Firm Characteristics and Financial Stability, Tier Three Commercial Banks, Kenya