Determinants of financial distress in Kenyan Commercial Banks
Ndungu, Roseanne Wanjiru
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The recent relapse of bank failures in Kenya has been a cause for concern especially after a period of several years of stability in the banking sector. Past studies have identified key determinants of financial distress but few studies have established the effect of spreads on financial distress. This study therefore sought to establish the determinants of financial distress in Kenyan commercial banks. Specifically, the study looked at the influence of leverage, overly aggressive activity, insider lending, ownership structure, bank size and financial soundness (capital adequacy, asset quality, management efficiency, earnings, liquidity and market risk) as bank specific factors. It also looked at economic growth, the central bank rate and interbank activity as macro-economic factors. The study adopted a post positivistic philosophy and a quantitative research design. The methodology employed was panel data. A multivariate regression model was used to test the hypotheses and link the variables. The study took on a census approach and all forty-three Kenyan commercial banks were taken as the population. Secondary data was extracted from the financial statements of all commercial banks and Central Bank of Kenya website for the period 2012-2018. The study found that leverage, overly aggressive activity, market risk and bank size negatively and significantly affected the level of financial distress. Earnings, liquidity and the spread on insider lending are found to positively and significantly affect financial distress. Private ownership was associated with higher degrees of financial distress. Lastly, macro-economic factors were found to be poor indicators of the level of financial distress explaining less than two percent of the variation in financial distress levels. The study recommends that financial ratio analysis be complemented with additional evaluations, with extra features such as competitive position, capital structure, and regulatory compliance among others being encompassed within the final evaluation.