Inclusive Finance, Bank Regulation, Concentration And Financial Stability In Kenya

Abstract

Kenya has over the years supported the expansion of financial infrastructure and implemented major reforms in bank regulations to ensure efficiency and stability of the financial system. Despite these reforms, the financial system is still being exposed to volatilities in form of liquidity and credit risks that threatens the stability of the financial system. Empirical evidence on how inclusive finance, bank regulation and bank concentration affect financial stability is scant. This thesis contributes to a growing literature on financial stability by investigating whether there are trade-offs or synergies between inclusive finance, bank regulation, bank concentration and financial stability in Kenya. The novelty of this study lies on the use of Structural Equation Model (SEM) technique in uncovering the determinants of financial stability. The analytical framework utilizes time series data for the period 1990 to 2017. Estimation results reveals that financial access and usage plays a significant role in ensuring stability of the financial system. Specifically, deposit mobilization, opening of branches and automated teller machines (ATMs) in rural areas, internet banking and utilization of electronic systems fosters financial stability. The study also established that inflation, credit growth and real interest rate negatively affects financial stability.We also established that micro and macro prudential regulations affect financial stability. Regulatory authorities should therefore complement micro and macro prudential regulations to ensure financial system stability. Finally, the study findings reveals that higher concentration negatively affect financial system stability. This thesis concludes that inclusive finance, prudent bank regulation, bank competition and concentration are important drivers of financial stability.