Kenya’s banking sector has become increasingly concentrated through mergers, acquisitions, restructuring and technology-led scale expansion, with a small group of listed institutions controlling more than three-quarters of sector assets. Whether the resulting market power protects franchise value and promotes prudent behaviour or weakens competitive discipline and increases risk remains unresolved. This study examines the effect of market power on the financial stability of Kenyan listed commercial banks, controlling for lagged stability, the cost-to-income ratio, risk-based capital, risk-weighted assets to total assets, inflation and the lagged natural logarithm of GDP. It uses a balanced quarterly panel of eight Nairobi Securities Exchange-listed banks over 2013Q1–2025Q2 (392 bank-quarter observations after lagging) and is anchored on the Structure–Conduct–Performance paradigm. Following a Hausman test (chi-square = 75.7104, p < 0.001), the preferred model is a bank fixed-effects Panel EGLS regression with cross-section weights and panel-corrected standard errors. The lagged dependent variable is positive and significant (ρ = 0.4947, p < 0.001), confirming strong persistence in bank stability. Market power, measured by the banks share of assets, exerts a negative and statistically significant effect on financial stability (β = −0.7669, p = 0.0343), supporting competition–stability. Risk-based capital (β = 1.1625, p < 0.001) and the risk-weighted-assets-to-total-assets ratio (β = 0.2161, p = 0.0258) are both positively and significantly associated with stability, while the cost-to-income ratio (β = −0.2241, p < 0.001) and GDP growth (β = −0.0286, p = 0.0220) are negatively and significantly associated with stability; inflation is negatively signed but statistically insignificant (β = −0.4241, p = 0.1013). The model explains 87.2% of the variation in stability (weighted R² = 0.8720; F = 183.4554, p < 0.001), and the results are broadly robust to an alternative two-quarter lag structure. The findings indicate that rising market power among Kenya’s listed banks is associated with reduced financial stability, evidence consistent with weakening competitive discipline and implicit too-big-to-fail expectations among dominant institutions. The study recommends that prudential capital regulation be complemented by active competition-policy oversight of concentration and market power, that supervisors monitor risk-weighted asset composition and cost efficiency alongside capital adequacy, and that further consolidation in the sector be evaluated against its implications for scale efficiency as well as competitive discipline.
Godfrey Omondi Odundo, P. Ndichu, S. Ondiwa· American Journal of Economic...· 0 citations
Since the Global Financial Crisis, the stability of commercial banks has remained a central policy concern, intensifying in Kenya where mergers, acquisitions and restructuring have concentrated more than 75% of banking-sector market share among nine listed banks. The Central Bank of Kenya has simultaneously tightened Basel III-aligned risk-based capital requirements, yet whether such capital regulation, alongside the underlying risk composition of banks' balance sheets, translates into greater financial stability remains empirically unresolved for Kenya's listed banking segment. This study examines the effects of risk-based capital (RBC) on financial stability among Kenyan listed banks, controlling for the risk-weighted assets-to-total assets ratio, operational cost efficiency, and macroeconomic growth and anchored in the Buffer Theory of Capital. The study uses a balanced quarterly panel of eight Nairobi Securities Exchange-listed banks over 2013Q1–2025Q2. After introducing one-quarter lags, the estimation sample comprises 392 bank-quarter observations. A Hausman test supports bank fixed effects, and cross-sectional and period heteroskedasticity are addressed through Panel EGLS with cross-section weights and panel-corrected standard errors (PCSE). The lagged dependent variable, financial stability, is positive and highly significant (ρ = 0.5248, p < 0.001), confirming strong persistence and path dependence in bank stability over time. Risk-based capital exerts a positive and significant effect on financial stability (β = 1.2912, p = 0.0004), and the risk-weighted-assets-to-total-assets ratio is also positively and significantly associated with stability (β = 0.2656, p = 0.0045). The cost-to-income ratio is negatively and significantly associated with stability (β = −0.2210, p = 0.0002), while GDP growth is negatively signed but statistically insignificant (β = −0.0172, p = 0.1344). The model explains 86.6% of the variation in financial stability (F = 204.37, p < 0.001), and the results are broadly robust to an alternative two-quarter lag structure. The findings confirm that adequate risk-based capitalisation is central to bank resilience in Kenya and that the composition of risk-weighted assets carries independent information for financial stability beyond capital adequacy alone. The study recommends that capital regulation remain the cornerstone of prudential policy in Kenya, that supervisors monitor the evolving risk-weighted composition of bank balance sheets, and that operational efficiency be strengthened alongside capital adequacy requirements. JEL: G21; G28; G32; G34; L11
Omondi Godfrey Odundo, P. Ndichu, S. Ondiwa· European Journal of Economic...· 0 citations
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