Banking system adjustment to shock: The Kenyan case of liquidity-profitability trade-offs

Arbeitspapier

This paper has the dual objective of establishing whether episodes of market shocks necessarily trigger the choice between more liquidity and more profitability and ascertaining whether the post-shock recovery path is one of liquidity giving way to non-liquid assets growth and, therefore, more profitability that is accompanied by positive economic outcomes. Using annual bank-level data from 2002 to 2020 and a fixed-effects regression model within an unbalanced panel data framework, we establish that: (i) liquidityprofitability trade-offs exist and is amplified during period of shocks. The extent of those trade-offs is sensitive to bank-specific attributes, especially bank size. It is more pronounced among smaller banks than bigger ones (ii) The trade-offs ought to be seen beyond being self-preserving but as a necessary adjustment to assure general market stability and subsequent restoration of the positive finance-growth nexus in a calm environment. As a sufficient condition, the transition process requires a policy environment that is facilitative of real lending rates adjustments corresponding to the attendant risks as opposed to a sticky regime even on the back of expectations of a risk-based pricing mechanism being in place. Without policy disincentivizing the crowding-out, which is prevalent when asset quality is weakening, the transition after the shock to profitability aligned with the positive finance-growth nexus may be prolonged.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: KBA Centre for Research on Financial Markets and Policy Working Paper Series ; No. 56

Classification and Topics

• Classification: Wirtschaft

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Osoro, Jared ; Josea, Kiplangat
• Event: Veröffentlichung
• (who): Kenya Bankers Association (KBA)
• (where): Nairobi
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/253286
• Last update: 10.03.2025, 11:44 AM CET