Determinants of Financial Stability among Commercial Banks in Kenya

A Research Project Submitted to the Chandaria School of Business in Partial Fulfillment of the Requirement for the Degree of Master of Business Administration (MBA)The purpose of this study was to establish the internal and external factors that influence financial stability of commercial banks in Kenya. The study also aimed to determine the financial strategies used to enhance financial stability of commercial banks in Kenya. This study adopted a descriptive research design. This approach was used to describe variables rather than to test a predicted relationship between variables. The population of this study included 43 commercial banks in Kenya as at June 2016. The study adopted census survey on all the commercial banks in Kenya. The study administered the questionnaires to two top managers from each bank. The two top managers were derived from different branches of the same bank. The study further used random sampling to select the respondents among the top managers of commercial banks. The study administered the questionnaires to two top managers from each bank which made a total sample size of 82 respondents. The researcher used drop and pick method in administering the questionnaire. Descriptive statistics was employed in data analysis. Descriptive statistics included the means and frequencies were used to analyze quantitative data and capture the characteristics of the variables under study. The study further used inferential statistics such as regression and correlation to ascertain the relationship between independent and dependent variables. The finding showed that commercial banks operating costs, the size of the bank, board size, capital size, Sound Interest Rate Policy and productive employees influenced commercial bank financial stability. The results of the model summary indicated that bank internal factors combined accounted for 26.3% of the variation in financial stability. The finding showed that interest rates, inflation rates, interest rate spread, exchange rates and GDP growth influenced commercial bank financial stability. The external factor accounted for 29.1% of the variation in financial stability of commercial banks in Kenya. The findings revealed that commercial banks in Kenya used supervision, bank policy, financial reconciliation, income diversification and financial innovations in enhancing financial stability of commercial banks. This study concluded that for internal factors of the commercial banks which include operating costs, the size of the bank, board size, capital size, Sound Interest Rate Policy and productive employees affects financial stability of commercial banks. The study also concluded that commercial banks benefit from the increased business activities and thus improved profitability. The study further concluded that commercial banks must take measures is to diversify the financial sector in terms of both number of domestic competitors and types of saving and lending instruments available. The study finally, concluded that many banks through their financial stability reports must attempt to assess the risks to financial stability by focusing on a small number of key indicators. The study recommended that internal factors are within the scope of the bank to manipulate them. Therefore, commercial banks in Kenya should adjust their internal factors in order to boost their financial stability. The study also recommended that government through the central bank should formulate sound policies to regulated interest rates; inflation rates interest rates spread and the rate of economic growth. This will assist in ensuring financial stability of the commercial banks