Abstract:
Stable commercial banks stimulate economic growth by facilitating value exchanges.
The stability of commercial banks in Kenya has been a concern because of the waves
of collapse that have dotted the history of the banking sector. Studies on the drivers
of bank stability are essential for providing policy directions to improve bank
stability. Due to existing conflicting empirical evidence, this study further analyzes
the relationship between competition, profitability, risk-taking behavior, and stability
of commercial banks in Kenya. The study was guided by three theories: Too Big to
Fail Theory, Agency Theory, and Competition Fragility Hypothesis. This study
employed a causal research design with 31 licensed commercial banks in Kenya as
the target population. The study extracted data from published financial statements
of licensed commercial banks for the period 2001 to 2020. The data were analyzed
using the Generalized Method of Moments (GMM). The study finds that increased
competition and reduced market concentration result in a more stable banking sector.
The competition stability nexus is confirmed by the study, implying that measures
should be implemented to foster competition and increase profitability among banks.
This includes reduced barriers to entry and optimal capital requirements. A
significant positive relationship between profitability and stability of commercial
banks was found, implying that more profitable banks have a lower affinity for risk taking, thus making them more stable. The results indicate that banks’ risk-taking
behavior has an inverse relationship with stability. The study contributes valuable
insights to the existing literature by enhancing the understanding of banking industry
performance and aids policymakers, investors and banks in formulating effective
strategies. Measures should be implemented to ameliorate excessive risk-taking by
banks. The employment of elaborate exposure monitoring systems with clear
warning signs is encouraged
