The present paper aims to assess the systemic risk of the Kenyan banking system. We propose a theoretical framework to reveal the time evolution of the systemic risk using sequences of financial data and use the framework to assess the systemic risk of the Kenyan banking system that is regarded as the largest in the East and Central African region. Firstly, we estimate the bilateral exposures matrix using aggregate financial data on loans and deposits from annual reports and analyze the interconnectedness in the market using network centrality measures. Next, we extend the Eisenberg–Noe method to a multiperiod setting to the systemic risk of the Kenyan banking system, in which the multiperiod includes the dynamic evolutions of the Kenyan banking system of every bank and the structure of the interbank network system. We apply this framework to assess dynamically the systemic risk of the Kenyan banking system between 2009 and 2015. The main findings are the following. The theoretical network analysis using network centrality measures showed several banks displaying characteristics of systematically important banks (SIBs). The theoretical default analysis showed that a bank suffering a basic default will trigger a contagious default that caused several other banks in the sector to go bankrupt. Further stress test proved that the KCB bank theoretically caused a few contagious defaults due to an unusually high interconnectedness. This methodology can contribute by being part of monitoring system of the Central Bank of Kenya (regulatory body) as well as the implementation of policies (such as bank-internal stress tests) that assist in preventing default contagion.
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