Financial Liberalization and Performance: a Study of Kenyan Banking Industry

Abstract

This paper examines the empirical relationship between financial liberalization and bank performance in Kenya. The paper also assesses and identifies the various factors 'that explain commercial bank performance. Time series data covering the period 1973-2002 was analyzed. First, nature and characteristics of the data was assessed. Secondly the time series characteristics of the data was assessed using unit root tests to examine the stationarity of the variables used in the regression Besides the test for co-integration was performed to determine the long-run relationship of the non-stationary variables. Lastly estimation of the empirical model was done using the Ordinary Least Squares (OLS) method. The analyzed results show that financial liberalization impacted positively on bank performance. There was an improvement in bank performance following financial deregulation but further financial liberalization still needs to be undertaken Interest rate spread widened following the reforms This indicates that the process of financial liberalization was embarked on in an environment of high inflationary pressure, distressed financial system coupled with fiscal indiscipline and fragile institutional framework. Based on these results, several policy implications are drawn that aim at improving the performance of commercial banks for the benefit of the economy. The rest of the paper is organized as follows. The first chapter of this paper provides background information on financial liberalization .. and commercial banking in Kenya . The chapter also traces the statement of the research problem, significance of the study, hypothesis and finalizes with the objectives of the study. Chapter two constitutes the review of all aspects of relevant literature while chapter three comprises the model estimated in this study Chapter four zeros in on the data issues and empirical estimation while the last chapter presents the conclusions, policy implications, areas of further research and the lirnitations of study.