CAPITAL EFFICIENCY AND DEFAULT RISK, EMPIRICAL EVIDENCE FROM COMMERCIAL BANKS IN KENYA

Oduor Joseph Atieno, Tobias Olweny, Julius Miroga

Abstract


The main objective of this study was to determine effect of capital efficiency on default risk in commercial banks in Kenya. According to the bank supervisory report, the interest rate spread widened to 13 per cent at the end of December 2011 from 10.3 per cent by December 2010 which the CBK Governor termed as a sign of inefficiency in the banking sector. Secondary data was used in the study and descriptive survey design was applied. The target population was 42 Commercial Banks in Kenya out of which 2 were under receivership and 1 was under statutory management. Panel data for 39 commercial banks for the six years period from 2014 to 2019 were obtained from the CBK and individual bank websites. The study was guided by Agency theory, Moral hazard theory and Stakeholders theory. Descriptive statistics, correlation analysis and random and fixed effects were used for secondary data using E-views software. The findings indicated correlation coefficients of capital adequacy and return on equity of -0.14 and -0.11 respectively signifying a negative correlation between capital efficiency and non-performing loans. It was recommended that capital efficiency be strengthened to reduce non perfuming loans.

JEL: G10; G20; G21

Article visualizations:

Hit counter


Keywords


capital efficiency, default risk, commercial banks

Full Text:

PDF

References


Altunbas Y., Carbo S., Gardener E. P. M. & Molyneux P. (2017). Examining the relationships between capital, risk and efficiency in European banking. European Financial Management, 49-70.

Arrow, K. J. (1963). American Economic Review, 941-973.

Bauer P. W., Berger A. N., Ferrier G. D. & Humphrey D. B. (2018). Consistency Conditions for Regulatory Analysis of financial Institutions: A comparison of Frontier Efficiency methods. Journal of Economics and Business, Vol. 50 (2), 85-114.

Casu B., Girardone C. & Molyneux P. (2015). Productivity change in European banking: A comparison of parametric and non-parametric approaches. Journal of Banking and Finance, 28(10), 2521-2540.

C. B. K. (2011). Bank Supervision report. Nairobi, Kenya: CBK Publishers.

Cihak M. & Podpiera R. J. (2015). Bank behaviour in developing countries: Evidence from east Africa” IMF Working Paper.

Eisenhardt, M. (1989 ). Agency Theory. An Assessment and Review 14(1), 57-74.

Fukuyama, H. (2015). Technical and scale efficiency of Japanese commercial banks: A Non-parametric approach. Applied Economics, 25, 1101-1112.

Grigorian D. A. & Manole V. (2016). Determinants of Commercial Bank Performance in Transition: An Application of Data Envelopment Analysis. World Bank Policy Research Working Paper, 2850.

Hyz, A. (2010). Job satisfaction and employee performance of Greek banking staff: An empirical Investigation. Acta universitatis lodziensis Folia oeconomica, 239.

Im Pesaran K. & Shin Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115, 53-74.

Kablan, S. (2014). Banking efficiency and financial development in Sub-Saharan Africa. IMF Working Paper WP/10/136.

Levin A., Lin C. & Chu C. (2002). Unit root tests in panel data: Asymptotic and nite-sample properties. Journal of Econometrics 108, 1-24.

Matutes C. & Vives X. (2018). Imperfect competition, risk taking, and regulation in banking. European Economic Review 44, 1-34.

Ngigi, G. (2014). High interest rates leave banks with Sh70bn in bad loans: Banks feel the heat of new CBK order on bad loans. Nairobi: Business Daily.

Oyuke, J. (2012). Treasury in new bid to tame rogue banks. The Standard Newspaper.

Rangan N. Grabowski R. Aly H. Y. & Pasurka C. (2018). The technical efficiency of US banks. Economics Letters, 28, 169–175.

Yeh, Q. (2016). The application of data envelopment analysis in conjunction with financial ratios for bank performance evaluation. Journal of the Operational Research Society, 47, 980-988.




DOI: http://dx.doi.org/10.46827/ejefr.v5i2.1180

Refbacks

  • There are currently no refbacks.


Copyright (c) 2021 Oduor Joseph Atieno, Tobias Olweny, Julius Miroga

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

The research works published in this journal are free to be accessed. They can be shared (copied and redistributed in any medium or format) and\or adapted (remixed, transformed, and built upon the material for any purpose, commercially and\or not commercially) under the following terms: attribution (appropriate credit must be given indicating original authors, research work name and publication name mentioning if changes were made) and without adding additional restrictions (without restricting others from doing anything the actual license permits). Authors retain the full copyright of their published research works and cannot revoke these freedoms as long as the license terms are followed.

Copyright © 2016 - 2023. European Journal of Economic and Financial Research (ISSN 2501-9430) is a registered trademark of Open Access Publishing Group. All rights reserved.

This journal is a serial publication uniquely identified by an International Standard Serial Number (ISSN) serial number certificate issued by Romanian National Library. All the research works are uniquely identified by a CrossRef DOI digital object identifier supplied by indexing and repository platforms. All the research works published on this journal are meeting the Open Access Publishing requirements and standards formulated by Budapest Open Access Initiative (2002), the Bethesda Statement on Open Access Publishing (2003) and  Berlin Declaration on Open Access to Knowledge in the Sciences and Humanities (2003) and can be freely accessed, shared, modified, distributed and used in educational, commercial and non-commercial purposes under a Creative Commons Attribution 4.0 International License. Copyrights of the published research works are retained by authors.