Macroeconomic shocks and cedit risk in the Kenyan banking sector

Faith Atiti, Stephanie Kimani and Raphael Agung

No 58, KBA Centre for Research on Financial Markets and Policy Working Paper Series from Kenya Bankers Association (KBA)

Abstract: This paper examines how macroeconomic shocks affect credit risk in the Kenyan banking sector. Using an autoregressive distributed lag (ARDL) model within a time-series framework, we establish the existence of both a short-run and long-run nexus between macroeconomic variables and bank-credit risk. We establish a negative relationship between credit risk and GDP growth although not significant. We also find that the relationship between bank profitability and asset quality is negative in the short-run but positive in the long-run. The paper also documents a positive short-run relation between asset quality and private sector credit growth, which turns negative in the longrun. Furthermore, the bank asset quality-capital nexus is positive in the short-run but turns negative in the long-run. The concave relationship suggest that NPLs will rise with increases in capital to a certain threshold (moral hazard effect), after which more capital build ups decrease NPLs (disciplinary or regulatory effect). Finally, the speed of adjustment coefficient is negative and statistically significant. A shock in any period is self-correcting at a rate of 24.96%, implying that the long-run market equilibrium is restored within a period of four quarters.

Date: 2022
New Economics Papers: this item is included in nep-ban, nep-cwa, nep-fdg and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:kbawps:58

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