The Influence of Capital Adequacy Ratio on the Financial Performance of Second-Tier Commercial Banks in Kenya

Abstract

Performance of most mid-tier commercial banks in Kenya has been fluctuating over the past few years. Meanwhile, some of them continue to post impressive results as majority report losses and others merge in order to remain sustainable. This situation points to financial performance affecting the mid-tier commercial banks in Kenya. The government, through the Central Bank of Kenya, introduced prudential regulations aimed at bringing sanity in the banking industry. This move led to closure of Dubai Bank and Imperial Bank while Chase Bank went under statutory management awaiting new investors. From this, an investigation was done on how Central Bank regulations influenced financial performance of second-tier commercial banks in Kenya. Based on the study, this paper explores how capital adequacy ratio influences financial performance of commercial banks in Kenya. The study was purely quantitative research and, therefore, correlation research design and descriptive research designs were used. The study was conducted in 14 second tier commercial banks in Kenya. It collected financial data from 2013 to 2016, considering that the regulations came into effect in 2013 from CBK and commercial banks websites. The data was sourced from Central Bank of Kenya after getting permission and approval from National Commission for Science, Technology and Innovation (NACOSTI). Data collected was analysed using descriptive and inferential statistics. Multiple Regression Analysis was used to test the study research hypothesis. Findings were presented through tabulations and graphical illustrations. Computed correlation showed that capital adequacy ratio had significant strong positive relationship (p<0.05) with financial performance of mid-tier commercial banks. In conclusion, it was found that capital adequacy ratio is among the main predictors of mid-tier commercial banks’ financial performance. It was therefore recommended that CBK needs to regularly monitor commercial banks by ensuring that they publish their quarterly results to the public. The investment regulators in the country such as the Capital Markets Authority (CMA), Kenya Banker Association (KBA) and Central bank of Kenya can use these study findings to understand the bottom line impact of bank regulatory requirements and in understanding banks decision on to its customers.

Keywords: Capital Adequacy Ratio, Commercial Banks, Financial Performance, Influence, Kenya


Article Review Status: Published

Pages: 13-23 (Download PDF)

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