The Nexus between financial soundness indicators for commercial banks in Kenya

Abstract

The Banking sector stability and soundness is paramount in the achievement of a sustainable and stable economic growth and is also of prime interest to various investors and policy makers. Therefore, the purpose of this paper is to evaluate the interrelatedness of financial soundness indicators using the CAMEL indicators, across the overall banking sector in Kenya and to compare the interrelatedness of these indicators in a tier analysis using data for the period between 2001 and 2018. The study employed fishers unit root test to first test for the stationarity of the variables, both endogenous variables (bank specific) and exogenous variables (macroeconomic), where some variables were stationary at level and others at first differencing. Panel V AR model was used to test for the interrelatedness between the Financial Stability Indicators. The results suggest that for the overall banking sector and the different tiers, there is a significant interdependence between the indicators.