Financial Inclusion, Bank Competitiveness and Credit Risk of Commercial Banks in Kenya

Stephen Muathe,Lucy Mwangi,Salome Musau

doi:10.5430/ijfr.v9n1p203

Abstract

This paper provides an empirical analysis of the synergies and trade-offs between financial inclusion and credit risk of commercial banks in Kenya. The paper analyzed the effect of financial inclusion on credit risk and the mediation effect of bank competitiveness of commercial banks in Kenya. Financial inclusion was measured using three dimensions of bank availability, bank accessibility and bank usage, bank competitiveness used (HHI) while credit risk was represented by the non performing loans ratio. The study was anchored on financial intermediation theory supported by finance growth theory and asymmetry information theory. The target population was all the 43 commercial banks in Kenya. The study used secondary data collected from Central Bank of Kenya annual reports; commercial banks of Kenya published audited financial statements and annual data from Central Bureau of statistics of Kenya for the period of 2007-2015. Data was analyzed using descriptive statistics and panel multiple regression analysis. The results obtained found that bank availability, bank accessibility and bank usage had significant effect on credit risk of commercial banks in Kenya. Bank competitiveness was found to partially mediate the relationship between financial inclusion and credit risk. From the findings the study concluded that financial inclusion has a significant effect on stability of commercial banks in Kenya. The study recommends that commercial banks to formulate policies to ensure they remain stable and competitive while accommodating their activities to ensure financial inclusion, hence forming an all inclusive and stable financial sector over time.

Highlights

Fluctuations in the global financial system are a constant concern and due to this many countries are prioritizing financial stability over financial growth, as growth may be unsustainable over long periods if there is instability (Schneider, 2008)
While policy makers are concerned more about the systematic banking crisis, individual bank fragility can be worrying since several systematic banking crises start as crisis in individual banks
This study used the index of financial inclusion (IFI) developed by Sarma and Pias (2011)

Summary

Introduction

Fluctuations in the global financial system are a constant concern and due to this many countries are prioritizing financial stability over financial growth, as growth may be unsustainable over long periods if there is instability (Schneider, 2008). Spratt (2013) observed that a financial system can become unstable, triggering crisis that devastate the real economy as evidenced by the global financial crisis of 2007-2009 if sound, appropriate and effective regulation is not provided. After the Global Financial Crisis of 2007-2009, policy makers across the world including both advanced and developing countries have put bank stability agenda as a priority (Beck et al, 2009). While policy makers are concerned more about the systematic banking crisis, individual bank fragility can be worrying since several systematic banking crises start as crisis in individual banks. The debate on the factors that affect bank stability continues but very little is known on how financial inclusion affects bank stability (Kalunda, 2015)

Objectives

Methods

Results