Basel Accord Requirements and Financial Performance of Commercial Banks in Kenya
Wanjiru, Mathina Ruth
MetadataShow full item record
An efficient, stable and well-functioning banking system contributes to the economic growth of a country. However, the decline in financial performance of commercial banks in Kenya based on average return on assets is of high concern among various stakeholders, that is, the average return on assets was reducing over the period of study, 4.7% in 2013, 3.4% in 2014, 2.9% in 2015, 3.3% in 2016, 2.7% in 2017, 2.7% in 2018, 2.6% in 2019 and 1.7% in 2020 despite the introduction of banking regulations in regard to capital, supervision and market discipline by the central bank of Kenya. Basel II is the second Basel accord requirements and is based on three main pillars including capital, supervisory review and market discipline. It is therefore vital for banking institutions to understand the linkage between Basel accord requirements and financial performance in order to enhance financial performance in the long run. The general objective of the study was to investigate the effect of Basel accord requirements on financial performance of commercial banks in Kenya. Specifically, the study aimed to determine the effect of capital, supervisory review and market discipline on financial performance of commercial banks in Kenya. The study further sought to establish the moderating effect of market share on the relationship between Basel accord requirements and financial performance of commercial banks in Kenya. The study was founded on asymmetry information theory, buffer theory of capital, relative market power hypothesis and agency theory. Positivism research philosophy and casual research design were employed. The target population comprised of forty-three commercial banks from which a sample of thirty-eight commercial banks was obtained. Commercial banks which were actively operating and not under statutory management during the period of study were selected. Thus, the study used purposive sampling technique. Data for the period between 2013-2020 was extracted from the bank supervision annual reports and individual bank’s published annual reports using document review guide (Appendix I). Data analysis involved descriptive statistics (maximum and minimum values, standard deviation and mean) and inferential analysis (panel regression and correlation analysis). The study conducted panel unit root test, multicollinearity test, normality test, heteroscedasticity test and autocorrelation test to avoid spurious results. The 5% significance level was used to test the research hypotheses. Correlation results show that supervisory review, market discipline and market share were positively and significantly correlated with financial performance of commercial banks in Kenya while capital had a positive insignificant correlation with financial performance. The panel regression findings showed that market discipline had a positive insignificant effect on financial performance of commercial banks in Kenya as measured by return on assets while capital and supervisory review had a positive significant effect on financial performance of commercial banks in Kenya. Market share had a negative significant moderating effect on the relationship between capital and return on assets of commercial banks in Kenya. Market share had a negative insignificant moderating effect on the relationship between supervisory review, market discipline and financial performance of commercial banks in Kenya. The conclusion of the study was that Basel accord requirements including capital, supervisory review and market discipline jointly explains the variation in financial performance of commercial banks in Kenya. Further, increase in capital and supervisory review enhances financial performance. The study thus recommends that the central bank of Kenya and other regulatory bodies like capital market authority should design banking policies for implementing Basel accord requirements and enhancing financial performance of commercial banks in Kenya.