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Module 4 · Topic 1Why Do Banks Fail?
Causes of Bank Failure
Banks fail for various reasons — most commonly a combination of poor governance, excessive risk-taking, and deteriorating asset quality. Common causes include:
- Non-Performing Loans (NPLs): When too many borrowers default on loans, a bank's assets erode
- Liquidity Crisis: When a bank cannot meet withdrawal requests even if it is technically solvent
- Fraud and Mismanagement: When funds are misappropriated by management or insiders
- Economic Shocks: Broad economic downturns that affect many borrowers simultaneously
- Concentration Risk: Over-exposure to a single borrower, sector, or currency
Bank failures, while rare in Kenya, do occur. KDIC's existence means that when they do happen, ordinary depositors are protected and do not lose their savings.
The Central Bank of Kenya (CBK) monitors all member institutions continuously through its CAMELS-based supervisory framework to identify early signs of distress — and intervenes before failure occurs wherever possible.