Abstract
The policy debate on the trade-off and synergies between bank concentration and financial stability remains unresolved. Previous studies suggest two hypotheses; ‘concentration-stability’ and ‘concentration-fragility’. This paper investigated the effect of bank concentration on financial stability in Kenya using Structural Equation Modelling (SEM) for the period 1990-2017. Estimation results reveal that high concentration leads to instability of the financial system. Further, increased competition improves stability of the financial system while regulation positively affects financial stability and bank concentration. Therefore, policies that ensures less bank concentration and enhance bank competition may significantly improve financial stability. Keywords: Financial stability, Banking Fragility, Structural Equation Model JEL classification: G21, G28. DOI : 10.7176/EJBM/11-25-08 Publication date :September 30 th 2019
Highlights
Bank concentration is the extent to which the banking sector is controlled by few larger banks in terms of their market share (Beck et al, 2003)
This study sought to explore the link between bank concentration and financial stability with competition as an intervening variable
We used data from Global Financial Development Database (GFDD) and Central Bank of Kenya (CBK) for the period 2004-2016 to estimate the weights of each measurement variable; we further conducted an exploratory and confirmatory factor analysis
Summary
Bank concentration is the extent to which the banking sector is controlled by few larger banks in terms of their market share (Beck et al, 2003). There were 49 commercial banks operating in Kenya as at the end of December 2000. Out of these banks, the government of Kenya owned five while four banks were locally incorporated foreign owned banks. The remaining 40 banks were privately owned domestically, with three banks having subsidiaries outside Kenya (CBK, 2000). The number of locally owned private commercial banks marginally declined to 28 as at the end of 2012 while foreign owned banks increased to 13. Out of the 13 foreign owned banks, 9 were local subsidiaries while 4 were branches of foreign banks. The government had majority shares in three privately owned commercial banks (CBK, 2012)
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