| dc.description.abstract | Banking institutions as key participants in the economy's payment system
leverage their equity capital with demandable debt. This debt creates risks that
could disrupt a country's payment system, which could affect the general
economy as a whole. The threat of a banking institutions falling into liquidity
problems can be reduced by reducing moral hazard problems, reducing adverse
selection problems, insuring depositors funds and instilling banking regulations
that constrain risk-taking and defining standards of capital adequacy (Hughes et
al 1997). Banks however, could also reduce risks of liquidity or financial distress
by injecting in more capital, which could act as safety net of a banks exposure to
risks. While this could lower profits in the short term, it could increase the
bank's value in the long run. To investors such banks have a high market value
than the others. Therefore, this paper examines the effidencv of banking
institutions in Kenya and measures efficiency by comparing the market value and
book value using stochastic frontier technique. The paper further examines how
the input-output factors of the production plan affect efficiency; the study finally
compares efficiency scores of highly capitalized banks with those of low
capitalized banks. By high capitalization the bank considers the banks with
above average capital to assets ratio and vice versa for the low capitalized. The
findings of the study were quite different from findings of other studies, the low
capitalized banks were more efficient than the highly capitalized banks for each
year from 1999-2001 and for the overall average of the period 1999-2001. This
showed that capital ratio cannot be used to discriminate efficient banks from
inefficient banks it also showed banks over reliance on customer deposits as a
sourceof funds rather than injecting in more capital. It also signaled the safety
of Kenya'sfinancial market. | en |
