The Effects of Bank Size Components on the Credit Risk of Commercial Banks in Kenya

Abstract

Commercial banks improve and stabilize economies globally, thus leading to economic growth and development. Such benefits manifest in the form of financial intermediation, transaction facilitation, access to funds, and other services such as mortgages and letters of guarantee. Improvement in the stability of banks is, thus, expected to enhance the economy. Among the financial intermediaries operating in Kenya, commercial banks have remained the dominant group. Consequently, their distress or collapse is likely to have a lasting and detrimental repercussion on the domestic bourse, financial system, and economy. Entering into financial hurdles like in the case of Imperial Bank and Chase Bank can result in bank runs, and eventually, a financial crisis as witnessed in the 2007-2009 subprime mortgage crisis. Even though the local banking industry has remained relatively stable for the past three decades, commercial banks have exhibited an increase in NPLs. Thus, this study sought to establish the effects of bank size components on commercial banks' credit risk in Kenya. The study was based on the agency and the stewardship theories. This study adopted a descriptive research design, and the population comprises 42 Kenyan commercial banks as of December 2019. The research utilized secondary data obtained for the period between 2015 and 2019 and analyzed them using a multiple regression model. The study results revealed that asset base had a positive and significant effect on credit risk, while customer deposits had a positive and insignificant effect on credit risk among Kenyan commercial banks. The results further indicated that shareholders' equity had a negative and significant effect on credit risk among commercial banks in Kenya. The results further established a negative and significant association between capital adequacy and Kenyan commercial banks' credit risk. At the same time, liquidity had a positive and insignificant effect on credit risk among Kenyan commercial banks. The study, therefore, concluded that asset base, shareholder equity, and capital adequacy significantly affect Kenyan commercial banks' credit risk levels.