Financial Liberalization and Performance of Commercial Banks in Kenya

Abstract

Many countries have made attempts to liberalize their financial sectors by removal of government ceilings on interest rates, eliminating or reducing credit controls, allowing free entry into the banking sector, giving autonomy to commercial banks, permitting private ownership of banks, and liberalizing international capital flows in a bid to improve the efficiency of investment and eventually economic growth of a country. It is also the movement of capital, the opening of financial markets to international operators and deregulation in lending and deposit rates to increase interbank competition. The financial liberalization therefore promotes the role of the market and minimizes the role of the state in determining who gets and gives credit and at what price. This study therefore sought to conceptualize the effect of financial liberalization on performance of commercial banks in Kenya. The researcher was guided by the following objectives; reviewing theoretical literature on the construct of financial liberalization on performances of commercial banks, this was done by reviewing past but recent related empirical literature and journals on the constructs of financial liberalization on performances of commercial banks and identifying the emerging theoretical and empirical gaps that form the basis of future research. The study was important in that its findings may enable bank to come up with policies that will enhance their Performances as a result of financial liberalization and serve as a benchmark for policy formulation by the government through the Ministry of Finance and the Central Bank of Kenya on enacting laws and regulations that may enable financial liberalization to stabilize Kenyan banking sector. The study reviewed theoretical models of McKinnon–Shaw hypothesis, Keynesian theory of investment, portfolio and inflation tax model and financial liberalization theory in explaining the effect of financial liberalization on performances of commercial bank. This exposed contextual, empirical and conceptual gap that form the basis for advancing preposition of this independent paper. The researcher in her study therefore, proposes that financial liberalization should be encouraged in order for development and growth in developing countries to be realized but should be done under close monitoring and supervision by a regulating body and in this context, it should be under the watch of the central bank.