Effect of firm characteristics on credit creation of listed Commercial banks in Kenya

Abstract

This study investigates the influence of firm characteristics on credit creation among listed commercial banks in Kenya over the period from 2019 to 2023. The primary objective is to examine how capital adequacy, asset quality, management efficiency, and bank size affect the ability of these banks to extend credit, measured as the ratio of total loans to total deposits. A descriptive correlation research design is employed, utilizing panel data analysis with fixed and random effects models to assess the relationships between the variables. The target population comprises all 12 listed commercial banks in Kenya, with secondary data sourced from the Central Bank of Kenya and published financial reports. The findings indicate a significant positive relationship between capital adequacy and credit creation, suggesting that higher capital buffers enhance lending capacity. Asset quality also exhibits a positive correlation with credit creation, indicating that lower non-performing loan ratios support greater lending potential. Management efficiency shows a marginally negative effect, implying that efficient operations may reduce capital buffers to prioritize lending. Bank Size demonstrates no significant impact on credit creation. The study underscores the importance of robust capital standards, effective credit risk management, and operational efficiency in enhancing credit creation. These findings provide insights for banks and regulators to strengthen financial stability and support sustainable credit growth in Kenya.