Capital adequacy, competition and liquidity creation of banks; evidence from Kenya

Dennis Muchuki Kinini, Peter Wang’ombe Kariuki, Kennedy Nyabuto Ocharo
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Abstract

Purpose

The study seeks to evaluate the effect of capital adequacy and competition on the liquidity creation of Kenyan commercial banks.

Design/methodology/approach

Unbalanced panel data from 36 Kenyan commercial banks with licenses from 2001 to 2020 is used in the study. The generalized method of moments (GMM), a two-step system, is employed in the investigation. To increase the robustness and prevent erroneous findings, serial correlation tests and instrumental validity analyses are used. The methodology developed by Berger and Bouwman (2009) is used to estimate the commercial banks' levels of liquidity creation.

Findings

The study supports the financial fragility-crowding out hypothesis by finding a significant negative effect of capital adequacy on the liquidity creation of commercial banks. The research also identifies a significant inverse relationship between competition and liquidity creation, depicting competition's value-destroying effect.

Practical implications

A trade-off exists between capital adequacy and liquidity creation, which must be carefully evaluated as changes in capital requirements are considered. The value-destroying effect of competition on liquidity creation presents a case for policy geared toward consolidating banks' operations through possible mergers and acquisitions.

Originality/value

To the best of the authors' knowledge, this is the first study to empirically offer evidence concurrently on the effect of competition and capital adequacy on the liquidity creation of commercial banks in a developing economy such as Kenya. Additionally, the authors employ a novel measure of competition at the firm level.

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银行的资本充足率、竞争和流动性创造;肯尼亚的证据
本研究旨在评估资本充足率和竞争对肯尼亚商业银行流动性创造的影响。研究采用了 36 家肯尼亚商业银行 2001 年至 2020 年的非平衡面板数据。研究中采用了广义矩方法(GMM),这是一种两步系统。为提高稳健性并防止错误结论,使用了序列相关性检验和工具有效性分析。研究发现资本充足率对商业银行流动性创造有显著的负面影响,从而支持了金融脆弱性--挤出假说。研究还发现竞争与流动性创造之间存在显著的反向关系,这说明竞争具有价值破坏效应。实际意义资本充足率与流动性创造之间存在权衡,在考虑资本要求变化时必须对此进行仔细评估。竞争对创造流动性的价值破坏效应为通过可能的兼并和收购来整合银行业务的政策提供了依据。 原创性/价值 据作者所知,这是第一项同时就竞争和资本充足性对肯尼亚等发展中经济体商业银行创造流动性的影响提供实证证据的研究。此外,作者还在公司层面采用了一种新的竞争衡量标准。
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来源期刊
CiteScore
3.20
自引率
7.70%
发文量
41
期刊介绍: African Journal of Economic and Management Studies (AJEMS) advances both theoretical and empirical research, informs policies and practices, and improves understanding of how economic and business decisions shape the lives of Africans. AJEMS is a multidisciplinary journal and welcomes papers from all the major disciplines in economics, business and management studies.
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