Abstract
A stable banking sector is significant in ensuring economic growth as well as sound, efficient and stable financial system. However, the banking sector in Kenya has been considered fragile and this is evident from the increasing trend of non-performing loans, fluctuating deposit trend of some commercial banks and fluctuations of foreign liabilities in commercial banks in Kenya, which is associated with financial stability. Furthermore the collapsing of some commercial banks and some being put under receivership is of great concern to the financial stability of the commercial banks in Kenya. The general objective of the study was to establish the effect of CAMEL variables on financial stability of commercial banks in Kenya. The specific objectives of the study were to determine the effect of operational efficiency, capital adequacy, bank liquidity, profitability and asset quality on financial stability of commercial banks in Kenya. The study was carried out in 17 fragile commercial banks in Kenya between 2011 and 2018. Generalized Method of Moments (GMM) model guided by dynamic panel regression results revealed that operating efficiency had a statistically significant positive effect on financial stability (β= 0.3104109, p=0.037) of commercial banks in Kenya. The study also established that capital adequacy had a statistically significant negative effect on financial stability (β= -0.1560403, p=0.050) of commercial banks in Kenya. The study further revealed that bank liquidity had a statistically insignificant negative effect on financial stability (β= -0.0073553, p=0.881) of commercial bank in Kenya. In addition, profitability had a statistically significant negative effect on financial stability (β= -0.1064231, p= 0.036). Finally, the study revealed that asset quality had a statistically significant positive effect on financial stability (β= 0.0987029, p= 0.032). Based on these findings, the study recommends for mergers and acquisition among the fragile commercial banks as per the fragility index, adoption of internal economics of scale, limits on insider loans to be established and credit to borrowers should not exceed 15% of the capital. This would ensure a sound and vibrant economy towards achieving the Vision 2030 that advocates for well-functioning, efficient and stable financial system. Keywords : Camel Variables, Firm characteristics, Financial Stability, Dynamic Panel Regression. DOI: 10.7176/RJFA/11-18-10 Publication date: September 30 th 2020
Highlights
Financial stability of a commercial bank is the backbone of the entire financial system as banks assume a focal role in the economic growth (Hussein, 2010)
5.0 Conclusions and Recommendations Based on the findings, the study concluded that commercial banks in Kenya should ensure that the Camel variables requirements are implemented to the later
This will help in ensuring that commercial banks in Kenya are stable since Camel variables have a significant effect of financial stability of commercial banks in Kenya
Summary
Financial stability of a commercial bank is the backbone of the entire financial system as banks assume a focal role in the economic growth (Hussein, 2010). Social and economic factors while endogenous variables comprise bank’s capital adequacy, liquidity, level of profitability, asset quality, management efficiency and the solvency of the bank. These variables are common to all commercial banks and they have a huge effect on the accomplishment of the financial stability state (Dovhal & Chamara, 2015). The financial stability of the banking sector needs to be established to ensure steadiness in the financial system
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