The effect of financial liberalization on the stability of Commercial Banks in Kenya

Abstract

The major negative implications of global crisis on the financial systems and real economies of the countries of the world have brought into focus of the decision makers and researchers the problem of evaluating and monitoring the financial stability of the banking sector. One line of research has focused on the relationship between financial liberalization and the stability of banking sector. This study contributed to the line of research by examining the effects financial liberalization on the stability of banks in Kenya. The study design was a descriptive survey which targeted all commercial banks in the Kenya banking sector. Secondary data was used in this study. Descriptive (mean and standard deviation) and inferential statistics (paired samples t-test) were used to analyze data. The study established that financial liberalization influenced the stability of banks in Kenya. Financial liberalization affected the rate of inflation, exchange rate volatility, Treasury bill rate and GDP growth rate. The highest rates of inflation and highest fluctuations in the rates of inflation were recorded during the period of financial liberalization. The study recommends that the central bank of Kenya should come up with a policy package that combines financial liberalization with structural reforms to raise productivity, improve stability of financial institutions and fast-track path to development. Structural reforms that improve macro and microeconomic stability in Kenya can make financial liberalization successful.