Effect of Commercial Bank Failures on Financial Performance of Tier 111 Banks in Kenya

Abstract

This study examined how bank failure announcements for Dubai Bank, Imperial Bank Limited and Chase Bank Limited affected the financial performance of tier III banks in Kenya. The population of study consisted 18 tier III banks in Kenya that were in operation from December 2016 to June 2018. The analysis was on a quarterly basis and covered a period of two years before and two years after the bank failure announcements. Kenyan banks are categorized as large, medium and small. Tier III banks are those categorized under small peer group. Financial performance was measured using Return on Assets (ROA) while other financial variables (liquidity, asset quality and capital adequacy) were also used to test the effect bank failure announcements had. Data for the 18 tier III banks was obtained and analyzed using event study methodology and trend analysis. Statistical Package for Social Sciences (SPSS) was used in the analysis by performing a paired t-test of difference of means of the data before bank failure versus actual performance after bank failure announcements. Paired test of difference in means for actual performance after bank failure and the expected performance after bank failure was also done. The study also used charts to perform a trend analysis. After the failure of Dubai Bank, Imperial Bank and Chase Bank Limited, the Kenyan economy witnessed several shifts in commercial banks. Some banks and mainly the tier III banks were acquired by big banks both local and foreign, others were put under CBK support for a while, others sold part of their fixed assets to boost their liquidity and capital levels and some are still struggling to be liquid as per regulatory requirements. The results showed p-values of < 0.05 for ROA, liquidity and asset quality leading to a conclusion that the difference in means is significant for these variables. Accordingly, bank failure announcement had a negative and significant correlation with ROA and liquidity and a positive and significant correlation with asset quality. On the other hand, p-value for capital adequacy was > 0.05 leading to the conclusion that the difference in means is not significant for capital adequacy. Therefore, bank failure announcements affected ROA, liquidity and asset quality negatively while no significant effect was observed on capital adequacy for tier III banks. Accordingly, the deterioration in performance of tier III banks in post event window could be associated to the bank failure announcements. As a result, the study recommends that regulators should put in place stringent measures and implement multi-dimensional early warning system towards preventing bank failures that may affect other institutions negatively.