Strategies Adopted To Enhance Financial Stability Among Commercial Banks In Kenya

Abstract

A safe and sound banking system ensures the optimal allocation of capital resources, and regulators therefore aim to prevent costly banking system crises and their associated adverse feedback effects on the real economy. Commercial banks need to proactively study the operating environment and develop relevant strategies that would reduce the severity of their exposure to situations that are likely to affect their financial stability. The general objective of this study was to determine the strategies adopted to enhance financial stability among commercial banks in Kenya.This study was led by the following specific objectives: to determine the effect of innovation on financial stability of the banking industry in Kenya; To establish the effects of competitive pricing of services on financial stability of the banking industry in Kenya; To find out the effects of credit risk management policies on financial stability of the banking industry in Kenya; and to establish the effect of recapitalization on financial stability of the banking industry in Kenya. The study was carried out within the 43 licensed commercial banks in Kenya. Since commercial banks have their head offices in Nairobi. The study covered the period 2010 to 2015 where the banking industry has seen major stability challenges since the onset of financial crisis in the United States.This research problem was studied through a descriptive cross-sectional survey. The target population of this study comprised of all 342 employees in the finance department of the 42 commercial banks and the sample was 86 respondents. The study collected primary. Primary data were collected using questionnaires and secondary data were collected from the annual financial statements of each of the commercial bank in Kenya. The returned questionnaires were checked for consistency, cleaned, and the useful ones coded and analysed using the Statistical Package for Social Scientists (SPSS) computer software. The researcher analysed the quantitative data using descriptive statistics including: frequencies, percentages, means and standard deviations. The qualitative data were coded thematically and then analysed statistically. In addition, the study conducted an inferential statistics in the form of correlation and multiple regression analysis. The study found out that the development of new innovative financial service delivery channels had improved the banks financial stability, pricing of financial services was based on market intelligence information, banks reviewed its credit risk policy from time to time to take into account the changes in the operating environment and banks were well capitalized as per the provisions of the Banking Act. The study concludes that improved financial stability had been realized as result of reduced cost of financial transactions that can be attributed to financial innovation, commercial banks review their credit policy from time to time to take into account the changes in the operating environment and financial recapitalizing does have a positive relationship with financial stability of commercial banks in Kenya although the effect is very minimal. The study recommends that commercial banks should ensure new products introduction, reduction of costs, improved innovation process and conformance to regulations to influence profitability of the bank, there should be efficient ways for mitigating credit risk and bank capitalization should be encouraged in all commercial banks so that stability can be enhanced.