Financial Liberalization and Performance of Commercial Banks in Kenya

Abstract

Financial Liberalization and Performance of Commercial Banks in Kenya 1. Background Financial liberalization has been defined by different authors to like, Kaminsky and Schmukler (2003), they defined it as deregulation of the foreign sector capital account, contrary to the stock market and domestic financial sector which viewed it separately. McKinnon and Shaw (1973) eluded that financial liberalization is involved the establishment of interest rates that are higher and equalizing to the demand for, and the supply of savings. They reiterated that higher interest rates will culminate to increase in savings and financial intermediation whilst improving efficiency of savings. When interest rates increased, financial intermediation also increases and in return enhances economic growth. A number of the third world countries have embraced financial liberalization, this has been done by elimination of interest rates, reducing borrowing, allowing freedom of entry into and out of the banking sector, granting the right of self-government to commercial banks, giving rights of private ownership of banks, and liberalizing international capital flows. Farhani, MhamdiAguir, Smida (2015) reports that, a number of economies have experienced significant transformation s which are regulatory and institutional in nature. These transformations have changes altered the behavior of institutions and capital markets. These changes have been brought about by financial liberalization in the 1980s, which in return has affected most emerging countries. Farhaniet.al, ( 2015) mention McKinnon and Shawn on the analysis of the financial repression over time, they found out that excessive government intervention characterizes this phenomenon. Financial liberalization has been endorsed to counter this situation, reason being that efficiency of investment was improved which in return leads to higher economic growth. In summary, financial liberalization has been categorized into three major reforms. Capital movement liberalization, unveiling of financial markets internationally, granting freedoms in lending and deposit to financial entities in order to increase interbank competition. A fully liberalized securities market allows investors to