Effect Of Financial factors on Financial Distress Of Tier Two Commercial Banks In Kenya

Abstract

Kenyan banking sector is a fast growing industry playing a critical role in the economy of the country by significantly contributing to the GDP. Despite this growth, the banking sector still faces a number of obstacles that threaten its performance. There are a number of challenges that exist in this sector and among the most notorious challenges is financial distress which is a phenomenon that has steered the closure of several tier two commercial banks thus crippling the financial sector, frustrating investors and creating a major setback in the economy. This study sought to establish the effect of financial factors on the financial distress of tier two commercial banks in Kenya. The variables under this research were leverage, liquidity, organizational size and foreign ownership. The general objective of the study was to establish the effect of financial factors on financial distress of tier two Commercial Banks in Kenya while the specific objectives were to determine the effect of leverage and liquidity, establish the effect of firm size and evaluate the effect of foreign ownership on financial distress of tier two commercial banks in Kenya. The study considered the Trade Off theory, Liquidity Preference theory and Wreckers theory of financial distress. Causal research design was used in the study with a target population of 13 tier two commercial banks in Kenya and covered a ten-year period between 2009 and 2018. 11 out of the possible 13 banks were used in the study since two of the banks were under receivership at the time the study was carried out. The study used secondary data which is quantitative in nature collected from the banks’ financial statements. Beneficiaries of the findings of this study included investors, policy makers, management and other researchers. Various diagnostic tests were conducted; these included the Hausman test, Normality test, Multicollinearity test, Linearity and Homoscedasticity test. Panel Regression model was used to predict the effect of financial distress of tier two commercial banks in Kenya using STATA statistical software version 14. Analyzed data was presented in tables and graphs. The study revealed a significant relationship between leverage as a financial factor on financial distress of tier two commercial banks in Kenya. The study recommends that commercial banks should strike a balance between debt and equity in their capital structure and that they should not place much emphasis on debt as too much of it would result to financial distress