FACTORS AFFECTING BANK FAILURE OF COMMERCIAL BANKS LISTED AT THE NAIROBI SECURITIES EXCHANGE THROUGH LOAN LOSS PROVISION

Abstract

The motive and objective of this research is to investigate the factors affecting bank failure of commercial banks listed on the Nairobi Securities Exchange through Loan Loss Provision in Kenya. To attain this objective, I utilized secondary data, mainly use of the financial statements of the commercial banks published from their respective bank website. The target population comprised of the commercial banks listed at the Nairobi Securities Exchange between 2013 and 2017. There were 11 commercial banks that were listed at the NSE (Nse.co.ke., 2019).

Data Envelopment Analysis is used to measure the efficiency and probability of bank failure. The analysis showed that 0.941 which implies that 94.1% of the commercial banks are efficiently controlled, operated and regulated. Multiple regression analysis was utilized and it showed that earnings management and capital management have negative insignificant relationship on Loan Loss Provision while GDP found to have a negative significant relationship. Bank size, loan deposit ratio and inflation have a positive significant relationship on Loan Loss Provision. According to the hierarchical regression analysis done on the moderating tests and coefficents, the results of the findings in this research concludes that Loan Loss Provision moderates the relationships between the independent variables(CIR, CAR, LogN, LoanDeposit ratio, GDP, Inflation) and bank failure measured by DEA-CRSTE are consistent with the findings. The results implies that when LLP is used as an interaction with the financial and macro-economic factors, the overall influence is different with when LLP and the financial and macro-economic factors are considered as independent stand alone variables. Moreover, recommendations for further study is presented in this research.