Bank Provisioning Behaviour, Ownership Structure and Financial Crisis: Evidence from a Developing Economy

Abstract

Abstract

Existing literature shows that several factors drive loan loss provisioning among banks. However, little is known on this topic in the African banking “context” and specifically Kenya's banking industry. Using hand-collected annual bank-level data for the period 2002 to 2018, this paper investigates whether provisioning behaviour depends on banks' idiosyncratic or systematic factors. The study also investigates whether provisioning is pro or counter-cyclical through business and credit cycles and whether provisioning behaviour is heterogeneous for different bank groups. Estimation results reveal that provisions are used for capital and earnings management but the findings are sensitive to bank size and ownership status. Further, the evidence suggests that provisioning reflects changes in asset quality and is counter-cyclical to the business cycle.

Keywords: Capital Management, Loan Provisioning, Income-Smoothing, Procyclicality, Signalling

JEL Classification: G21; G28; M41                                       

ORCID iD 0000-0001-8783-4312

Acknowledgments

This paper was supported by African Economic Research Consortium (AERC) under the thematic research grant no. RT19523, to the author.  All errors and omissions are the author’s sole responsibilities.