Foreign-owned banks and their impact on Kenya’s financial stability

Abstract

We examine the effect of foreign banks’ presence on financial stability in Kenya. We consider a two-fold outcome, that is, whether or not foreign-owned banks enhance financial stability in Kenya. To ascertain this, we use binary regression approach involving a logit model. Our results suggest that foreign-owned banks have no important direct effect on financial stability in Kenya; rather, financial stability depends on the credit policies of the banks and their balance sheet structures, regardless of the ownership type. Foreign capital in the banking sector in Kenya is not a deciding factor in influencing the stability of the sector and measures to promote local banks and government banks should be encouraged. Generally, positive macroeconomic development drives Kenya’s financial stability and increases foreign banks’ penetration by encouraging them to expand through aggressive credit policies. Our findings suggest that it is the macroeconomic conditions and prudential regulations in Kenya that enhance financial stability and not necessarily the presence of foreign-owned banks.