Prudential Regulations and Financial Performance of Commercial Banks in Kenya

Abstract

Banks are the primary intermediaries for the reason that in various countries of the world, they carry out financial intermediation. Through the years, different countries have gone through an unprecedented number of failures in the commercial banks internationally. These failures have prompted the need for a more serious focus on suitable methods of improving the performance of national financial systems. Further than the intermediation task, the banks’ performance of banks carries a huge implication to expansion of an economy. The fall down in banks’ performance has been worrying. The study examined the consequence of prudential system on performance of Kenyan banks. The explicit goal was to examine the effect of capital adequacy, liquidity and credit risk regulation on performance of Kenyan banks. Finally, the study examined the moderating effect bank size on the interlink between prudential regulations and financial performance of banks. Stakeholder Theory, Liquidity Preference and Market Power concepts was of guidance. Causal design of research was utilized in the study. The population target was 42 banks operational from 2013 up to 2018. Census was the approach of gathering data. The data to be collected was secondary in nature. The analysis involved the application of both descriptive and panel regression analysis. In analyzing, STATA software was used. Ethical concerns on the subject of this research was duly complied with. The findings revealed regulation of capital adequacy had a statistically significant influence on the financial performance of banks at p value (p=0.000<0.05). The analysis further revealed that regulation of liquidity had a statistically significant influence on financial performance of the commercial banks (p=0.035<0.05). On average non-performing loans stood at Ksh. 2496.78 million over the five-year period. Results further show that credit risk was a significant determiner of financial performance of commercials banks in Kenya (p=0.014<0.05). When it comes to bank size, the findings showed that the Kenyan banks averaged at 4.29 Billion. As a moderator, it was found that bank size did not significantly influence the relationship between prudential regulations and financial performance (p=0.289>0.05) and its interaction with capital adequacy, liquidity and credit risk did not have any significant effect on ROE. The study recommends that Central Bank of Kenya should tighten regulation on capital adequacy, to create more balance in the core capital and total assets of banks. This would bridge the huge gap identified between banks with high capital and total assets and those with minimum core capital and total assets. The Central Bank of Kenya should also put more effort to regulate the liquidity of the industry to ensure that the huge gap in liquidity is minimized to promote equal growth in the industry. Tight regulations on credit risks more so on non-performing loans should be put into effect to ensure that banks bear less risks from the NPLs