Camel Rating System and Financial Performance of Rwandan Commercial Banks
Ngoboka, Jean Paul Hakizakubana
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Financial institutions hugely contribute to Rwandan economic development. However, different studies showed that they expose to risks that limit them from attaining their objectives. The banking sector’s liquidity, efficiency, and profitability in Rwanda have weakened in the past four years – 2015 to 2018 and its performance indicators collapsed. This study intended to examine the effect of the CAMEL rating model on the financial performance of commercial banks in Rwanda for the period ranging from 2014 to 2018. It was underpinned by four theories namely; cash management theory, agency theory, liability management theory, and market power theory. This paper covered11 commercial banks operating in Rwanda and adopted secondary data published by the Central Bank of Rwanda and the official websites of mentioned the 11 banks.Descriptive research design and panel regression were employed to evaluate the correlation between the predictor and outcome variables. The findings concluded that capital adequacy and asset quality are positively correlated to determine the value of financial performance. Liquidity management, management efficiency, and earnings management have a negative correlation. However, capital adequacy, asset quality, management efficiency are statistically significant to predict the ROA at a 5% level. This paper recommends that both the banks’ management and financial regulatory body should work together to formulate policies that would help improving banking sector efficiency without violating the right of their clients. When it comes to the evaluation of financial institutions, all the CAMEL model factors should be considered.