CLIMATE- DRIVEN LIQUIDITY RISKS AND THE FINANCIAL STABILITY OF COMMERCIAL BANKS IN KENYA
CLIMATE- DRIVEN LIQUIDITY RISKS AND THE FINANCIAL STABILITY OF COMMERCIAL BANKS IN KENYA
Ruth Mwaura - Postgraduate Student, Department of Accounting and Finance, Kenyatta University, Kenya
Dr. Farida Abdul - Senior Lecturer, Department of Accounting and Finance, Kenyatta University, Kenya
Dr. Vincent Shiundu Mutswenje (Ph.D) - Department of Accounting and Finance, Kenyatta University, Kenya
ABSTRACT
Commercial banks remain central to credit intermediation, savings mobilization, and payment systems, making their stability essential for sustained economic growth. In Kenya, this stability has been increasingly tested by climate variability heighten financial risks. Sector-wide resilience, measured by the average Z-score, fell sharply from above 100 in 2010 to about 18 in 2013, before settling in a range of 26 to 40 between 2021 and 2024. Although climate shocks are now recognized as key threats to banking systems, empirical evidence on their precise impact, particularly through mediation and moderation channels, has been mixed. This study examined how climate-driven liquidity risk affect the financial stability of commercial banks in Kenya. The analysis was anchored on Liquidity Preference Theory and Financial Sustainability Theory. A census of all 39 commercial banks was undertaken using secondary data from audited bank statements, Central Bank of Kenya supervision reports, macroeconomic bulletins, and climate-event records covering the period 2010–2024. Financial stability was proxied by the Z-score, while earnings volatility was measured as the rolling standard deviation of return on assets. Fixed effects panel regressions confirmed that climate-driven credit risk (p<0.001) significantly reduced financial stability. The findings suggest that credit and liquidity shocks erode stability, The study concludes that climate-driven liquidity risk significantly undermines financial stability by constraining the ability of banks to meet obligations and sustain lending operations during periods of heightened uncertainty. The study therefore recommends that supervisory authorities embed climate-event funding shock simulations into mandatory liquidity stress testing frameworks.
