IMPACT OF COVID-19 ON THE FINANCIAL STABILITY OF COMMERCIAL BANKS IN KENYA
Abstract
Countries worldwide were gripped by the COVID-19 pandemic for the greater part of 2020 and 2021. COVID-19 spread to virtually all nations around the globe, causing a contraction of the global economy, and Kenya was no exception. Governments worldwide deployed social distancing, lockdowns, and curfews, which resulted in employee lay-off, business closure, and suppressed demand for commodities and services, eventually trickling down to commercial banks. The Kenyan banking sector experienced deterioration in asset quality which has been worsening since 2014 when it stood at 5.6 percent, reaching an all-time high of 14.5 percent in 2020 whereas Return on Assets which has also been declining since 2014, stood at 4.46 percent dropped to a record low of 2.07 percent in 2020 during the pandemic. This study, therefore, sought to determine how the financial stability of Kenyan commercial banks has been impacted by the COVID-19 shock. The study sought to specifically establish how both Z-score and capital adequacy of Kenyan commercial banks were impacted by the COVID-19 pandemic. Financial intermediation theory, Capital buffer theory, and Financial Instability Hypothesis anchored the study. The research design embraced was non-experimental, while the financial stability proxy was Z-score. The study’s target population was 19 commercial banks in Kenya between the years 2015 and 2022, which had complete data on all the study variables. Annual bank-level data was obtained from Kenya`s Central Bank`s annual supervision reports from 2015-2022. Event study methodology was used while collecting data whereby, the event window was 2020-2021, the period before the event (COVID-19) was 2015-2019, and the period after the event was 2022. The study espoused a panel vector autoregression model in data analysis where the impulse response functions were generated. The researcher discovered that the COVID-19 pandemic adversely impacted Z-score and capital adequacy. Based on the research findings, the Government of Kenya ought to institute non-disruptive pandemic control measures such as proper hygiene and wearing of masks as opposed to quarantines and lockdowns, which are detrimental to commercial banks' operations and other businesses, ultimately leading to a decline in income for commercial banks. Moreover, since capital acts as a shock absorber for banks, Kenyan commercial banks should strive to achieve and maintain the minimum capital adequacy ratios set by the Central Bank of Kenya. This will ensure that commercial banks in Kenya cushion themselves against economic shocks generated by pandemics such as COVID-19.
JEL: E44, E58, G01, G21, G28, G32
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DOI: http://dx.doi.org/10.46827/ejefr.v8i2.1714
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