Local and international dimensions of credit provision by commercial banks in Kenya

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Although considerable research has focused on the determinants of credit to the private sector, the issue still remains controversial, particularly with respect to the role of foreign banks in emerging markets. This study sought to understand the factors that affect lending of commercial bank loans both in form of foreign and local loans. It used panel data methods on quarterly bank-specific data covering the period from 2000 to 2013. In general, the results reveal that the ownership structure, housing variable and the size of the bank are the main determinants of aggregate commercial bank lending. This conclusion is maintained even when the determinants of foreign loans and local loans are specifically examined separately. However, the role of the liquidity measure is in not consistent in the different specifications while the role of interest rates is largely in line with expectation in most of the specifications. Implicitly, the results seem to suggest a need for mergers of small banks, policy focus on incentives for more local bank ownership and continued efforts on minimization of interest rate spread, which not only promote mortgage financing and home ownership, but also overall credit growth.

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    • Figure 1. Growth rates of private sector credit (PSC), foreign denominated credit (FC) and real Gross Domestic Product (GDP)
    • Figure 2. Pricing of loans: local and foreign denominated interest rate spreads
    • Figure 3а. Private sector credit by sector in the economy
    • Figure 3b. Private sector credit by sector in the economy
    • Figure 4. Development of Nairobi Stock Index and Housing index
    • Table 1. The dependent variable is all loans of commercial banks
    • Table 2. The dependent variable is foreign loans of commercial banks
    • Table 3. The dependent variable is local loans of commercial banks
    • Table 4. The dependent variable is all commercial bank loans but with interbank rate