Journal Article

Effect of External Debt On the Financial Performance of Commercial Banks in Kenya (2008-2022)

Lumumba, Immaculate Akech, Byaruhanga, John, Mungai, Angela

2024

Overview

This study analyses the impact of external debt on the financial performance of commercial banks in Kenya for the period 2008-2022. Employing descriptive, correlational, and inferential research designs, the study reviewed data from the Central Bank of Kenya, the World Bank, KNBS, and IMF on a quarterly basis. By employing the Augmented Dickey-Fuller test, ROE and external debt were further qualified to be stationary at first difference. The results highlighted by the Autoregressive Distributed Lag (ARDL) analysis indicated a statistically significant negative relationship between external debt and financial performance; the coefficients (-0.8998) confirmed that for every unit of increase in external debt, there would be a decline in ROE by 0.8998 units. The study establishes that external debt has been detrimental to the financial health of Kenyan banks due to the economic pressure it brings to the sector. For this purpose, it suggests that the government should avoid borrowing from external sources, and it has advised the development of measures that encourage overseas investors to invest in the country's banking sector. The policy of attracting FDI can enhance capital availability and alleviate the financial load on banking institutions. Relaxing regulations that restrict foreign investors would pave the way for this and help increase the bank’s performance, thus enhancing long-term economic growth.

• Publisher: Society for the Study of Business and Finance
• Subject: Banking industry / Borrowing / Central banks / Commercial banks / Deficit financing / Economic growth / Expenditures / External debt / Financial institutions / Financial performance / GDP / Gross Domestic Product / Hypotheses / Investors / Macroeconomics / Profitability / Return on assets / Return on equity / Stockholders