Prudential regulations and financial deepening among tier ii commercial banks in Kenya
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Date
2023-11
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Kenyatta University
Abstract
The ratio of bank deposits against nominal GDP is a good indicator of financial deepening among commercial banks. A critical analysis of this ratio with specific reference to Tier II banks in Kenya reveals a worrying trend. For instance, this ratio of deposits against gross domestic product of the tier II banks in Kenya has averaged at 8% from 2016-2020 as compared to an average deposits to GDP of 25% for Tier I banks. Prudential regulations have long been linked to financial deepening; however, the nature of the relationship between these two variables remains unclear. Thus, Prudential Regulations and financial deepening link among Tier II commercial banks in Kenya was explored. Specifically, capital adequacy, agent banking, corporate governance and liquidity management were studied in retard to financial deepening of Tier II commercial banks in Kenya. The agency theory, financial intermediation theory, liquidity management preference theory and the capital buffer theory anchored the study. The study used descriptive survey and correlational design with the target population being the eight Tier II commercial banks as licensed by the CBK as at 31st December 2021. Census was undertaken. Information in its auxiliary form was gathered over timeframe as from 2017 through 2021. The data analysis was carried out using both descriptive statistics such as means and standard deviations as well as inferential statistics such as correlation and regression. The results were then presented through tables and figures. Diagnostic tests covering normality, multicollinearity and autocorrelation were carried out prior to regression analysis. In the course of conducting this study, all the literature and information obtained was appropriately cited and referenced as an ethical concern. The study established that liquidity management exerted the greatest significant effect on financial deepening (β= 0.657, p<0.05) followed by corporate governance that had negative and significant effect (β= -0.567, p<0.05), agent banking (β= 0.027, p<0.05) and lastly capital adequacy (β= 0.001, p<0.05) respectively all having positive and significant effect on financial deepening. The study concludes that prudential regulation is an important variable that allow banks to grow their financial depths. The study recommends that tier II commercial banks in Kenya should establish an optimal level of the equities and assets that would optimize financial depth. The marketing managers working among tier II commercial banks in Kenya should invest more in direct sales people to promote and create more awareness among customers on the need to take up agent banking services. The boards of directors working in tier II commercial banks in Kenya should strengthen and improve on their oversight role, demand for accountability on the side of management and ensure they minimize conflicting interests between managers and shareholders. The marketing managers of the tier II commercial banks in Kenya should put in place sound marketing practices for maximization of the deposits from customers which are a key indicator of financial deepening that the study built on for economic progress.
Description
A research project submitted to the school of business, economics and tourism in partial fulfilment of the requirements for the award of the degree of master of business administration (finance option) of kenyatta university November, 2023 Supervisor: Joseph Theuri