Banking Sector Consolidation and Stability in Kenya

This paper sought to examine the evaluation of competition and stability conditions in the Kenya banking sector amidst adoption various aspects of consolidation. This was achieved by exploring evolution of competition and stability conditions using bank-level and peer-level annual data from 2001 to 2017 for 37 banks. The paper adopted three-step estimation approach; first, estimated two competition measures Lerner Index and Panzar-Rosse H statistics to assess evolution of competition conditions. Secondly, constructed two stability measures Altman Z - Score and Bankometer S - Score to assess evolution of stability conditions. Thirdly, using panel GMM estimators introduced the estimated competition measures as explanatory variables and re-examined stability conditions to evaluate the role of competition in promoting banking sector stability. The study findings indicate competition conditions have increased and can be characterized as monopolistic competition. The banking sector stability conditions are high and sound, though downward trending. Increase in level of competition promotes stability conditions. The paper concludes that, adoption of various aspect of banking sector consolidation has led to improved competition and stability conditions in Kenya. Banking sectors players should continue implementing and adopting various policies that promote competition and stability such as market driven consolidations. JEL classification numbers: G2, G01, G33. Keywords: Bank Stability, Consolidation, Competition, Market Power, Lerner Index, Altman Z-Score, Bankometer S-Score, H-statistics.