Firm Specific Factors And Financial Stability Of Commercial Banks In Kenya

Abstract

Globally, banks play an important role in the flow of resources from deficit to surplus spenders through intermediation for the enhancement of economic general well being. Commercial banks perform significantly in capital formation as they offer wide range of services for productive ventures and people. These banks are spread across Kenya with each competing for customers’ deposits toward solidification of the banks for effective and efficient service delivery within and outside the economy. These banks extend credit facilities to both individuals and businesses thereby ensuring the financing of other economic sectors. Despite the function performed by these commercial banks in economic stability, they have performed below expectation with some of the banks vulnerable to risk associated with financial performance and hence affecting their stability which has raised concerns from different stakeholders in the sector. Therefore, this research seeks to establish the link between firm specific factors and commercial banks financial stability in Kenya. In specific terms, the investigation evaluated the effect of capital adequacy, operational efficiency, credit size and earnings on Kenya’s commercial banks’ financial stability. As such the study was predicated on buffer capital, efficiency structure and financial intermediation hypotheses. The investigation employed explanatory design. The research target population comprised of forty Kenyan commercial banks which was arrived at using census approach. Secondary data was sourced from audited banks’ annual reports with the help of a secondary data review guide. Analysis of data was done using descriptive statistics and linear regression techniques with various diagnostic tests application. Ethical norms were adhered to so as to ensure the quality of the study outcome. The study made several conclusions based on the study findings. The study found that capital adequacy has no significant effect on financial stability of commercial banks in Kenya. The study found that operational efficiency has no significant effect on financial stability of commercial banks in Kenya. It was established that credit size has significant effect on financial stability of commercial banks in Kenya. The study found that earnings has significant effect on financial stability of commercial banks in Kenya. It was recommended that lending activities should be done with caution. Proper credit risk management system should be put in place which will help in assessing the credit worthiness of borrowers, analyze their repayment capabilities while also monitoring the progress of projects which loans were collected for. The study f recommended that banks should strive towards increasing their assets holding while applying strategies geared towards improving earnings alongside as these will in turn bring about improvements in the financial stability of Commercial Banks in Kenya. The study is of the suggestion that additional empirical researches can be done on listed commercial banks as well as non listed commercial banks in Kenya. This will provide basis for having comparisons of the firm specific factors and financial stability relationships in the context of commercial banks in Kenya. Additional studies can be done focusing of Insurance firms which are also important players in the financial sector. Further studies can as well be carried out on Microfinance Banks in Kenya.