Factors Contributing to Financial Distress in Commercial Banks of Kenya

Commercial banks could provide important benefits to economies and facilitate the objectives of financial liberalization, by boosting competition in banking markets, stimulating improvements in services to customers and expanding access to credit, especially to domestic small and medium-scale businesses. But the attainment of these benefits has been jeopardized because commercial banks have been vulnerable to financial distress. Substantial numbers of banks have failed, mainly because of non-performing loans. Poor loan quality has its roots in the informational problems which afflict financial markets, and which are at their most acute in developing countries, in particular problems of moral hazard and adverse selection. The Kenyan financial sector plays major roles in the country in promoting economic growth and development. However, financial distress is one the challenges that is hindering commercial banks from continuing contributing according to their potential to the GDP wellness. Some of the banks such as Imperial bank limited, Chase bank and Dubai Bank have been put under statutory management of late. For the purpose of attempting to unfold the issues of major concern, it was necessary to assess the factors contributing to financial distress in commercial banks. The specific objectives of this study were based on financial leverage, liquidity, credit risks and capital adequacy. It was further guided by relevant theories; modern portfolio theory, agency theory, pecking order theory and cash management theory. The study used research works particularly the ones published in the journal articles which were related to the topic under the study. This was supplemented by information in books concerning financial distress and commercial banks. The information was analyzed through content analysis by considering all the constructs used. The research designs adopted were also put into account. Meta-analysis research design was used to analyze these research works in the academic journals. The findings are of importance to commercial banks and Central bank. It provides information that can help them prevent and manage financial distress. The study found out that financial distress leads to poor performance and failure in commercial banks. The study also showed that financial distress had a significant effect on financial performance of banks where performance was negatively affected. A rise in financial distress led to a decrease in financial performance and vice versa. Both descriptive and inferential findings showed that financial distress in commercial banks was contributed by leverage, liquidity, credit risks and capital adequacy. The study established the need to reduce financial distress by ensuring financial stability in banks to ensure shareholders confidence. It was recommended that banks should adopt appropriate credit management strategies to control their lending. They should also make effective decisions on the means to fund their operations in different economic and financial conditions. This should indicate when equity or debt funds are suitable. Central banks should be stricter on their regulations concerning liquidity and capital reserves of the commercial banks.