Determinants of Banks’ Financial Stability in Kenya Commercial Banks

Abstract

Introduction: The collapse of several banks in Kenya followed by a possibility of acquisition of struggling banks led to bank runs in Kenya causing customers to withdraw their deposits from stressed banks and taking them to financially stable banks. Aim of the Research: The paper investigated the determinants of Bank’s stability as proxied by asset quality in the Kenyan banking sector. Data Collection: Monthly secondary data spanning from the period January 2015 to December 2019 was collected from central Bank of Kenya and Kenya National Bureau of Statistics. Methodology: A multiple regression model with the help of SPSS statistical software was employed to address the objective of this study. Main Results: The multiple regression model results indicated that liquidity ratio; inflation rate and lending rate results presented a negative but statistically significant relationship with banking stability indicating that a decrease in liquidity ratio, inflation rate and lending rates affect banking stability respectively. The results for loan growth and return on equity exhibited a positive but statistically significant relationship with banking stability indicating that an increase in growth of loans and returns on equity diminishes and enhances banking stability in Kenya respectively. Exchange rate results had a positive and statistically insignificant relationship with banking stability implying that exchange rate does not affect banking stability. Return on assets and public debt results indicated a negative and statistically insignificant relationship with banking stability implying that return on assets and a country’s public debt has no effect on banking stability respectively. Recommendation: Banking financial stability is fundamental in reducing the far-reaching social and economic effect that could occur due to challenges facing the banking industry. The study recommends adoption of policies that minimize the negative effect of microeconomic and macroeconomic factors in the banking industry in Kenya.