Do income diversification and capital adequacy affect liquidity creation? A case study of commercial banks in Kenya

Figures & data

Table 1. Bank activities classification

Assets
Illiquid (w = 1/2)	Semi-liquid (w = 0)	Liquid (w = −1/2)
Loans and advances; pledged assets; financial assets; other assets; investment in properties; equipment and property; other investments.	Investments in connected and subsidiary companies, goodwill, the bank’s portion of the provision for unearned income, as well as deferred acquisition costs and tax assets	Cash and due from banks and other financial institutions; available for sale securities; government securities; trading securities
Liabilities
Illiquid (w = −1/2)	Semi-liquid (w = 0)	Liquid (w = 1/2)
Other liabilities; long terms loans and bonds; other funding; reserves; medium-term borrowing	_____________	Demand deposits (current and savings); other deposits; tradable derivatives; trading liabilities; current tax liabilities; deferred taxation; other liabilities and interest payable; provisions and short-term borrowings
OBS items
Illiquid (w= 1/2)	Semi-liquid (w = 0)	Liquid (w = −1/2)
Inclusive of credit lines commitments, acceptances, documentary credits, guarantees, and other contingent liabilities	_______________	_______________
Equity(surplus)
Illiquid (w= −1/2

w represents the weight assigned

Source: Berger and Bouwman (2009)

Table 2. Measurement of study variables

Variable	Type	Measurement	Data Sources
Liquidity creation	Dependent	cat nonfat(CNFM) and cat fat measures(CFM))	Berger and Bouwman’s (2009) approach was used
Income diversification	Independent	Herfindahl-Hirschman index (HHI) Entropy index (EI)	Financial statements of commercial banks
Capital adequacy	Independent	Capital adequacy ratio (CAR) Tier 1 leverage ratio (LR)	Financial statements of commercial banks Central Bank of Kenya
Credit risk	Control	The ratio of the risk-weighted assets and the off-balance sheet activities divided by the total assets	Financial statements of commercial banks
Bank size	Control	The logarithm of total assets	Financial statements of commercial banks
Profitability	Control	Net income over the total assets (ROA)	Financial statements of commercial banks
GDP	Control	Real GDP annual growth rate	KNBS

Table 3. Descriptive statistics of the study variables

Variable	Variable label	Indicator	Mean	Std. Dev.	Min	Max
Cat fat measure	CFM	Dependent	0.469	0.194	−0.347	1.491
Cat nonfat measure	CNFM	Dependent	0.383	0.177	−0.358	1.490
Herfindahl Hirschman index	HHI	Independent	0.259	0.114	0.025	0.500
Entropy index	EI	Independent	0.062	0.039	0.000	0.360
Capital adequacy ratio	CAR	Independent	0.237	0.119	−0.480	0.904
Tier 1 leverage ratio	TLR	Independent	0.138	0.072	−0.474	0.603
Credit risk	CR	Control	0.007	0.048	0.000	0.753
Return on assets	ROA	Control	0.012	0.029	−0.180	0.350
Bank size	BS	Control	9.939	1.525	6.568	13.540
Gross domestic product	GDP	Control	0.047	0.022	−0.003	0.084

Note – All the study variables had 698 observations except HHI and CAR, with 699 and 697 observations, respectively.

Figure 1. The trends of study variables.

Table 4. Fisher type and im-pesaran-shin unit root tests

Variable		Fisher Type Test		Im-Pesaran-Shin Test			Decision
	z(t) at level	p-value for z(t) at I(0	p-value at I(1)	IPS T-bar statistic	Critical value at I(0)	Critical value at I(1)
CFM	175.139	0.000		−2.841	0.000		I (0)
CNFM	179.649	0.000		−2.918	0.000		I (0)
HHI(ID)	187.179	0.000		−3.074	0.000		I (0)
EI	157.894	0.000		−2.609	0.000		I (0)
CAR	187.671	0.000		−2.743	0.000		I (0)
TLR	206.098	0.000		−2.653	0.000		I (0)
CR	202.591	0.000		−2.993	0.000		I (0)
ROA	149.685	0.000		−2.888	0.000		I (0) I (1) I (0)
BANK SIZE GDP	30.168 115.987	1.000 0.000	0.000	−1.355 −2.777	0.874 0.000	0.000

I (0) mean stationary at level

I (1) mean stationary at first difference

Table 5. Pairwise correlation matrix

Variables	(1)	(2)	(3)	(4)	(5)			(6)	(7)	(8)	(9)	(10)
(1) CFM	1.000
(2) CNFM	0.903***	1.000
(3) CAR	−0.609***	−0.596***	1.000
(4) TLR	−0.360***	−0.402***	0.776***	1.000
(5) HHI(ID)	0.173***	0.167***	0.128***	−0.043	1.000
(6) EI	−0.179***	−0.272***	0.008***	0.103***	0.156***			1.000
(7)D.BANKSIZE	−0.014	0.006	−0.029	−0.106***	0.197***			0.046	1.000
(8) ROA	−0.206***	−0.236***	0.314***	0.349***	0.023			0.106***	0.146***	1.000
(9)CREDIT RISK	0.029	0.102***	0.094***	0.074*	−0.001			−0.063*	−0.014	0.009	1.000
(10) GDP	−0.011	−0.015	−0.040	−0.029	0.080***			0.108***	0.088***	0.060	−0.006	1.000

*** p<0.05, ** p<0.01, * p<0.1

Table 6. Two-step system GMM regression results

VARIABLES	(1) CFM	(2) CNFM	(3) CFM	(4) CNFM	(5) CFM	(6) CNFM
L.CFM	0.474*** (0.089)		0.626*** (0.092)		0.603*** (0.100)
L.CNFM		0.430*** (0.105)		0.525*** (0.122)		0.405*** (0.117)
CAR	−0.610*** (0.125)	−0.564*** (0.123)				−0.574*** (0.128)
TLR			−0.304* (0.173)	−0.416*** (0.171)	−0.320* (0.174)
HHI	−0.122 (0.076)	0.059 (0.082)	0.153 (0.096)
EI				−0.339*** (0.147)	−0.257 (0.165)	−0.262* (0.181)
D1.BANKSIZE	−0.052 (0.046)	−0.024 (0.052)	−0.046 (0.065)	−0.029 (0.059)	−0.037) (0.062)	−0.026 (0.052)
ROA	0.199 (0.242)	−0.174 (0.231)	0.102 (0.293)	0.098 (0.269)	0.094 (0.284)	0.181 (0.253)
CREDIT RISK	0.136*** (0.066)	0.244*** (0.070)	0.056 (0.054)	0.154*** (0.056)	0.047 (0.047)	0.247*** (0.072)
GDP	−0.177 (0.151)	−0.145 (0.157)	−0.119 (0.147)	−0.055 (0.184)	0.042 (0.192)	−0.066 (0.195)
Constant	5.027 (3.016)	6.883*** (2.765)	0.747 (2.929)	4.851 (2.070)	2.740 (2.468)	7.762*** (2.517)
Observations	661	661	662	662	662	661
Number of bank id	36	36	36	36	36	36
AR(1)	0.002	0.009	0.001	0.010	0.001	0.015
AR(2)	0.190	0.280	0.079	0.124	0.068	0.255
Hansen	0.143	0.133	0.111	0.106	0.103	0.106
Sargan	0.000	0.000	0.000	0.000	0.000	0.000
Number of instruments	27	27	28	27	27	27

*** = p<0.05, *= p<0.1. Standard errors are in brackets.The table presents two-step system GMM regression results with two measures of liquidity creation; CFM and CNFM. CFM is the Cat Fat Measure, a broad measure of liquidity creation, and CNFM is the Cat Nonfat Measure, a narrow measure of liquidity creation. Two measures of capital are used; CAR, the capital adequacy ratio (CAR) and TLR, the tier 1 leverage ratio. Two measures of diversification are employed; HHI, the Herfindahl-Hirschman index and EI, the Entropy index. Control variables include Bank Size, ROA (Return On Assets), credit risk (the ratio of the risk-weighted assets to total assets) and GDP.

Table

Absa Bank African Banking Corporation Bank Bank of Africa Bank of Baroda Kenya Bank of India Chase Bank Kenya Citibank N.A Commercial Bank of Africa Consolidated Bank Co-operative Bank of Kenya Credit Bank Development Bank of Kenya Diamond Trust Bank Ecobank Equity Bank Family Bank Giro Commercial Bank Guardian Bank Habib Bank AG Zurich Housing Finance Group I&M Bank KCB Bank Kenya Post Office Savings Bank Middle East Bank M Oriental Bank National Bank of Kenya NIC Bank Paramount Bank Prime Bank SBM Bank Sidian Bank Spire Bank Stanbic Bank Standard Chartered Bank Transitional Bank Victoria Commercial Bank

Berger, A. N., & Bouwman, C. H. S. (2009). Bank liquidity creation. The Review of Financial Studies, 22(9), 3779–3837. https://doi.org/10.1093/rfs/hhn104

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