Abstract:
The financial system in Kenya is bank based and therefore volatility in earnings can cause instability in the banking and financial industry with drastic consequences on the economy due to the bank failures and related contagion effect. Since, the banking sector reports have indicated failures over the last decade; this provides a rich background for examining earnings volatility in Kenya. Previous studies have addressed individual constructs such as income diversification in isolation hence due to a dearth of conceptual and contextual gaps such as differences in the nature of banking from conventional to Islamic banks and the use of different measures of study variables; the study evaluated the effects of bank specific facets and market concentration on earnings volatility among commercial banks in Kenya. The specific objectives included; to examine the effect of firm size, financial leverage liquidity, asset quality, income diversification and market concentration on the earnings volatility of commercial banks in Kenya. The study was underpinned by the efficient structure hypothesis, relative market power hypothesis, competition–stability theory, competition fragility theory and agency theory. The target population included all the 37 commercial banks licensed by the CBK for the period 2009-2021 and consistently reported earnings during the study period. The study employed an explanatory design and used panel regression analysis based on the secondary data. Collected data was collated and entered into statistical software (eViews) and analysed descriptively and inferentially. Panel regressions were conducted at significance levels of 0.05 with results being presented in graphical and tabular formats. The results showed that firm size, financial leverage, liquidity, asset quality and market concentration were statistically significant while income diversification was not statistically significant. The study findings therefore concluded that bank specific facets but for income diversification have a significant effect on the earnings volatility of commercial banks in Kenya The recommendations are; banks should improve on loan quality by reducing agency problems through credit referencing, improved oversight of the bigger banks, revenue diversification, and independent risk management practices such as internal audits.
