Financial regulation and financial stability in Kenya

Résumé

The main objective of this project is to examine the effectiveness of Basel regulations on the
financial stability of Kenya. In order to achieve this objective, quarterly time-series data ranging from 1995:1 to 2019:4 is employed. The empirical methodology of the study is conducted using a Structural Vector Autoregressive model. Five endogenous variables (z-score, bank capital to total asset ratio, regulatory quality index, liquidity assets to deposits and short funding ratio and bank regulatory capital to risk-weighted assets ratio) are used. Innovations in capital adequacy ratio has an economically significant effect on the financial stability of Kenya. There is a permanent positive response of financial stability to shocks in capital adequacy ratio. The result of minimum liquidity requirement ratio is statistically significant, but the sign is unexpected. A shock to liquidity requirement ratio has a negative effect on the financial stability. Bank supervisory guidance has no statistically significant effect on the financial stability of Kenya, likely due to the implementation problems of this regulation in the country. The variance decomposition result confirms the result of the impulse response function about the effectiveness of financial regulation variables on the financial stability of Kenya. Capital regulation shock explains 42.90% of the fluctuations of financial stability and the shock to liquidity requirement ratio explains 25.85%. Major challenges of Basel implementation in Kenya are lack of reliable data and information, development of the sound risk-management system, asymmetry in supervision, operational cost, access to finance, and market imperfection. Therefore, there is a need to hire highly qualified, responsible, transparent, and independent supervisors for the successful implementation of Basel Accords as the result supports that financial regulations have a significant effect on the financial stability of Kenya.

la date de réponse	2021
langue originale	Anglais
L'institution diplômante	Universite de Namur
Superviseur	YULIYA RYCHALOVSKA (Promoteur) & Marc Sangnier (Copromoteur)