Market Concentration, Risk-Taking And Performance Of Commercial Banks In Kenya

Abstract

The Kenyan banking system has gone through several adjustments ranging from mergers, acquisitions and structural reforms with an aim to improve efficiency and profitability. To achieve all this changes, banks face risks that affect their performance. This study investigates how concentrated markets and risk absorption affect performance of banks in Kenya using a panel fixed effects estimation technique for the period 2010 to 2018. Empirical findings reveal that Herfindahl-Hirschman index has no significant relationship with bank performance in Kenya and therefore fails to support the structure-conduct-performance hypothesis. We also found that credit risk negatively affects the performance of banks. Capital risk, liquidity risk, overall risk and bank size have no significant effect on bank performance. Banks should aim to minimize credit risk through prudential credit guidelines and avoid pursuing growth strategies sine there is no evidence to support economies of scale in the Kenyan banking system.