Relationship between Total Deposits and Market Concentration among Commercial Banks in Kenya

Abstract

Market concentration is a key concern in banking, given its implications for competition and financial stability. In Kenya, a small number of banks hold a substantial share of industry assets, deposits, and loans; this study examined whether total deposits explain market concentration among Kenyan banks. Market concentration was measured via a composite bank-level index of each bank’s annual share of industry assets, deposits, and loans, complemented by the industry-level Herfindahl-Hirschman Index (HHI). Anchored on Market Power Theory, the study used a descriptive correlational design with panel data from all 38 CBK-licensed banks (2019–2023), from audited financial statements and CBK Annual Bank Supervision Reports. Data were analysed using descriptive statistics, Pearson’s correlation, and multiple regression, controlling for net assets, equity, EBIT, and the regulatory capital ratio. The HHI analysis showed the sector remained highly concentrated, with modest annual variation. Total deposits showed a weak but significant positive bivariate association with market concentration (r = 0.178, p = 0.016), which became non-significant after controlling for bank-specific characteristics (B = −5.985 × 10⁻¹¹, p = 0.211), while net assets and the regulatory capital ratio remained significant. High collinearity among the monetary predictors (VIF > 100) means these coefficients, including the deposits estimate, warrant cautious interpretation. The study concludes that total deposits alone do not independently explain market concentration; broader indicators of financial strength and institutional capacity appear more influential. It recommends that policymakers combine industry-level measures like the HHI with bank-specific indicators, while banks continue strengthening deposit mobilisation to enhance resilience and competitiveness.