Relationship between macroeconomic factors and M&A deal flow in the banking sector in Kenya

Abstract

This study investigated the influence of macroeconomic factors on mergers and acquisitions (M&A) within Kenya's banking sector from 2005 to 2023. M&A activities serve as a strategic approach for banks to enhance shareholder value and maintain market relevance, making this research pivotal in addressing gaps in existing literature on developing economies. Using an Autoregressive Distributed Lag (ARDL) model, the study examined the relationship between the number of M&A transactions (dependent variable) and macroeconomic indicators such as GDP, inflation rate, interbank rate, CBK Weighted Average Rate (CBWAR), and exchange rate (independent variables). The findings revealed significant short-term relationships, particularly with the second lag of M&A transactions, the second and third lags of the inflation rate, and the current level of the USD/KES exchange rate. Inflation and exchange rate fluctuations emerged as critical drivers of M&A activity, highlighting the importance of macroeconomic stability. However, GDP, interbank rates, and CBWAR did not exhibit significant effects during the study period. These results offer valuable insights for policymakers, financial institutions, and investors by emphasizing the need for effective management of inflation and exchange rate stability to foster a conducive environment for M&A.