Bank competitive landscape and competition in the banking sector in Kenya

Abstract

This study investigates the evolution of competition among commercial banks in Kenya with changes in the bank competitive landscape. Employing system GMM and the performance dynamics approach, the study establishes that bank consolidation has an inverted U effect on competition in the banking sector in Kenya, growth in technology spurs competition among commercial banks in the short run but is impotent in the long run and the progressive increase in the core capital requirement for commercial banks from KES250 million in 2008 to KES1 billion in 2012 slowed competition in Kenya’s banking sector by 3.3 percentage points. Arising from the findings the study concludes that consolidation of commercial banks is a short to medium term instrument for promoting competition in the banking sector in Kenya, growth in technology is effective in promoting competition in Kenya’s banking sector in the short run rather than in the long run and blind increases in the core capital requirements can lead to undesired outcome of reduced competition in the banking sector in Kenya.

Keywords: Bank competitive landscape; Intermediation efficiency; Exceptional profits