Please use this identifier to cite or link to this item: http://ir.mu.ac.ke:8080/jspui/handle/123456789/5619
Title: Loan ratios, information asymmetry and fragility among Commercial Banks in Kenya
Authors: Bwiret Camus Onyango, Albert
Keywords: Loan
Information asymmetry
Commercial Banks
Bank
Issue Date: 2021
Publisher: Moi University
Abstract: Bank distress occurs when an institution is closed, receives open assistance or undergoes distressed merger while bank fragility manifests among others when a large proportion of a bank’s total loans is impaired. This study examined loan ratios and their effect on bank fragility as an early warning system to pre-empt bank distress. The study incorporated information asymmetry as a mediator. Though literature suggest information asymmetry plays a part in bank distress, studies incorporating information asymmetry in bank distress are scarce. Kenya’s cyclic banking distress has been a major problem; with latest distress event between 2015-2016 in which three commercial banks failed. The general objective of the study was to investigate loan ratios and their relationship with information asymmetry and the link with fragility among commercial banks in Kenya. The specific objectives were to establish the effect of loan growth ratio, loan to deposit ratio, loan quality ratio, insider loans ratio and the mediating role of information asymmetry on fragility among commercial banks in Kenya. The study was anchored on three theories; credit creation theory, which holds that banks transform deposit liabilities into illiquid loans without reducing its other customers’ deposits. The new loans enter the economic system as additional deposits enabling banks to lend more. Agency cost theory asserts that bank managers are driven by desire to generate profits and may lend without estimating risks appropriately. Adverse selection theory contends that banks engage in granting credit to high-risk borrowers who are willing to pay high interest rates. High-risk managerial action is possible due to information imbalance with other counterparties. The study period was 2005 to 2015 before imposition of interest rate controls in 2016. The study followed positivism approach with an explanatory research design. The target population was all the forty-two commercial banks in Kenya. Secondary data was collected from Central Bank of Kenya repository of commercial banks annual financial statements. Data was analysed using descriptive and inferential statistics. The research hypotheses were tested using generalised linear model. The results indicated lagged dependent variable had = +0.87, p< 0.05 a positive statistically significant influence, loan growth ratio = -0.08, p< 0.05 had a negative statistically significant influence on bank fragility, while loan deposit ratio = +0.13, p<0.05 had a positive statistically significant influence. The loan quality variable had = -0.06, p>0.0 while insider loans ratio had =+0.16, p>0.05 showing negative and positive statistically insignificant influence. The mediating variable had =-0.37, p>0.05 showing negative insignificant relationship with bank fragility. The Sobel test results had z-score between -1.96 to +1.96 which showed statistically insignificant influence therefore, information asymmetry did not mediate the effect of loan ratios on bank fragility. The study concluded that loan ratios are significant in predicting bank fragility. The study contributes information on early warning systems in bank fragility. The study recommends that regulators, policy formulators and bank managers periodically review loan ratios for signals of fragility. Further research should be conducted on other proxy measures of information asymmetry in bank fragility studies.
URI: http://ir.mu.ac.ke:8080/jspui/handle/123456789/5619
Appears in Collections:School of Business and Economics

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