Financial Crises and Economic Downturns of Commercial Banks in North Rift Region, Kenya

Abstract

Purpose: General objective of the study was to explore the financial crises and economic downturn of commercial banks in North Rift Region in Kenya. The study specifically sought to establish the effects of interest rates crisis, currency crisis, corporate debt crisis and liquidity crisis on economic downturns of commercial banks in North Rift Region in Kenya. The study was anchored on Credit Crunch Theory, the Debt Overhang Theory, the Liquidity Preference Theory and the Credit cycle Theory. Methodology: A descriptive survey design was adopted. The study population consisted of all the 44 commercial banks in the North rift region in Kenya and in each commercial bank, branch managers were also targeted who gave a clear overview of financial crises and how it affected the economic downturns of their respective banks. Purposive sampling was employed to select the 44 branch managers. The primary data was collected by using a questionnaire that was pretested for reliability and validity. The study also analyzed the data using both descriptive and inferential statistics. Descriptive statistics including percentages, frequencies, means and standard deviations were adopted in analyzing the data. Linear Regression analysis and correlation analysis as the inferential statistics were used to show the relationship that existed between the variables. The findings were then presented using tables. Findings: The study findings indicated that interest rates crisis had a significant negative effect on the economic downturns of commercial banks (p = 0.027, <0.05). The findings also indicated that currency crisis had a significant negative effect on the economic downturns of commercial banks with p = 0.033, <0.05. corporate debt crisis had a significant negative effect on the economic downturns of commercial banks (p = 0.015, <0.05). Liquidity crisis had a significant negative effect on economic downturns of commercial banks where the regression model also indicated that p = 0.002, <0.05. The study concluded that interest rates crisis, currency crisis, corporate debt crisis and liquidity crisis had a negative effect on the economic downturns of commercial banks. Unique contribution to theory, practice and policy: The study recommends that the commercial banks should develop products with flexible interest rates to cater to borrowers during periods of high interest rates. The management should consider offering fixed-rate loans for a limited term to provide some stability to businesses. The policy makers such as the Central Bank of Kenya should implement measures to stabilize the national currency and promote foreign investment during crises.