Determinants of Kenyan Commercial Banks deposits growth

Abstract

In Kenya, Commercial banks deposits growth has been on a slow increase while the demand for investment resources has been rising. Given the fact that government external debt servicing reduces the available investment resources locally, there was need to establish and study the determinants of Commercial bank deposit and their implications on Kenya's resource mobilization policy. This called for an assessment of the determinants and the role played by Commercial banks in mobilization of deposits. Kenya's profile of Commercial banks structure, ownership and importance of bank deposit was analysed. Its main objective was to analyze the factors that influence Commercial banks deposit growth in Kenya. Time series data covering 1968 - 2006 was analysed. First, the time series characteristics of the data were assessed using unit root tests to examine the stationarity of each variable. Secondly, the test for cointegration was performed to determine the long run relationship of the non stationary variables. Lastly, estimated model was a single regression equation with deposit as the dependent variable and explanatory variables as deposit rate, nominal exchange rate, investment income ratio, number of cheques cleared (used as proxy for innovations in the financial sector), real GDP, ratio of monetary GDP to total GDP and Structural Adjustment Programmes (SAPs). Estimation was done using Ordinary Least Squares (OLS) technique and Econometric Views (E-views) statistical package. Analysed results showed that lagged Commercial bank deposits and all the other variables including Structural Adjustment Programmes (SAPs) significantly affect Commercial banks deposit growth in Kenya. Based on these results, several policy implications were drawn that aim at encouraging deposits growth by Commercial banks for the benefit of the domestic deposit mobilization. First, growth enhancing policies promotes deposits growth. Second, the stability of - - macroeconomic system should be maintained. Lastly, financial sector innovations encourage deposit growth in Commercial banks in Kenya as people reduce their demand for carrying cash.