Lucas Njoroge and Anne Wangari Kamau
Savings and Development Vol. 34(2010), No. 2, pp. 191-217

This paper examines the effect of macroeconomic developments on performance, credit quality and lending behaviour of banks in Kenya, by estimating a dynamic panel data model using Generalized Method of Moments. The paper finds banks’ behaviour to be largely influenced by macroeconomic developments. During down turns, banks tend to lend less on account of increased credit risk, rationing credit as dictated by macroeconomic developments. The study suggests that banks need to continue pursuing risk sensitive loan pricing policies to ease the extent of procyclical/countercyclical behaviour during economic upswings/downswings respectively, which in turn reduces the chances of supply-driven credit crunch effects.

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