The Effect of Bank Distress on the Kenyan Economy

Abstract

The study aimed at establishing the various factors that affect the real GDP of the Kenyan economy, however great emphasis is on the effect of bank distress on the performance of the economy. The study used a time series data for the period from 1985 to 2015.The study applied a Vector Error correction model as determined by the presence of cointegration through the use of the Johansen test of cointegration. The period of consideration was crucial since it shows the critical dynamics the banking industry has evolved from, especially from the narrow traditional money depositing and borrowing obligations to the diversification of such roles to the provision of loan facilities to various stakeholders namely households, small savers, industries or even the government. Despite the major objective of the study being to assess the effect of bank distress on the Kenyan economic performance, the study incorporated a number of factors which seem to have either a direct or indirect impact on the loan performance but a direct influence on the Kenyan economic performance. The variables of analysis were; foreign direct investment, real effective exchange, remittances, government revenue, total investments and Bank distress. The study found out that existence of bank distress had a significant and retrogressive effect on the Kenyan real GDP performance, on the other hand the other factors namely Foreign Direct investment(FDI), Government revenue and proportion of GDP spent on investment had positive and significant effect on real GDP growth except the latter two which were insignificant. The appreciation of the Kenyan currency also did reveal an improvement in the real GDP contrary to expectation however this could be due to cheaper importation of efficient inputs. Finally, the study was able to establish that when all the other factors are held constant there will be (significant/insignificant) decline in the Kenyan economic growth, therefore we do conclude that despite the various regressors having varying effects on the real GDP, other factors not captured in the econometric equation have a negative effect on GDP growth.