Effects of Credit Risk Rating on the Firm Value of Listed Commercial Banks in Kenya

Abstract

The banking sector is key to boosting economic growth in any specific region. A stable and sustainable banking area produces successful output and controls cash flow, which in every given country promotes economic development. In Kenya, both domestic and international threats and uncertainties endanger efficacy and competitiveness in the banking sector. Despite the various control measures put in place especially the CBK’s prudential laws to ensure that the performance of commercial banks in Kenya is ensured, Kenyans have witnessed most commercial banks collapsed with a combined assets valuation of Kshs 187.9 billion. It is in this light that the current study sought to investigate the effect of credit risk rating on firm value of listed Commercial banks in Kenya. Descriptive research design was employed on a population sample of eleven publicly listed retail banks using census. Secondary data was collected from CBK and other public financial reports on a target of 11 retail banks over the 12 – year period from 2009 to 2020. The collected data was analyzed using a multivariate panel regression model while SPSS Version 23.0 was used to generate the relevant regression tests. Presentation of data results was done using charts and frequency tables for ease interpretation. The study established that the capital adequacy has a marginal positive impact on the firm value of Kenya commercial banks earning ability was found to have a statically insignificant positive effect on firm value among Kenya commercial bank. The study finding indicated that liquidity was insignificantly and negatively correlated with firm value of Kenyan commercial banks. On the other hands’ asset quality had insignificant positive effect on firm value among Kenya commercial bank. The study recommends that, managers of listed banks should embrace utilization of internally generated equity capital since this financing mode is cheaper and readily accessible source of capital that ultimately promotes credit risk rating of the firms. There is need to maintain optimal level of liquidity to maximize firm value. The quality of assets as well as higher but sustained levels of earning that boost output is to be keenly considered by management of the Kenya commercial banks maximizing value the firm value.