Central Bank Prudential Guidelines, Audit Committee and Financial Performance of Commercial Banks in Kenya
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Date
2025-04
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Publisher
Kenyatta University
Abstract
The financial performance of banks have been dwindling in Kenya. Kenya’s commercial banks’ ROA has been fluctuating over years for example ROA for commercial banks in Kenya was 3.3 % in 2019, 2.07 percent in 2020 and 3.3 percent in 2021, an indication of unstable financial performance. In January 2013, the CBK issued regulations referred to as prudential guidelines that outlines several aspects of financial management. This study sought to establish the effect of central bank prudential guidelines on financial performance of commercial banks. The specific objectives sought to establish the effect of capital adequacy, liquidity requirements and credit risk requirement on financial performance of commercial banks. It also sought to determine how audit committee moderate the relationship between CBK prudential guidelines and financial performance of commercial banks operating in Kenya. Four theories guided the study; Institutional Theory, Public Interest Theory of Regulation, Stewardship Theory and firm growth theory. The explanatory research design was adopted involving 39 commercial banks in Kenya according to CBK 2022. A census of all the 39 commercial banks was undertaken. Descriptive and inferential tests were adopted in analyzing the data. The descriptive tests included means, minimums, maximums, standard deviation, Kurtosis and Skewness. The particular inferential tests were the panel multiple regression model. Prior determining the multiple regression model, diagnostic model assumption tests were tested. The diagnostic tests comprised the normality tests, serial correlation test, heteroscedasticity, and Multicollinearity and Hausman tests. Presentation of results were done through figures and tables. The findings from the study showed that capital adequacy has positive and significant effect on financial performance of commerce banks. Similarly, liquidity requirements indicated positive and statistically significant effect on financial performance of commercial banks. However, credit risk requirement depicted negative and statistically significant effect on financial performance of commercial banks. Finally, audit committee moderated the relationship of prudential guidelines outlined by CBK on financial performance of commercial banks. A conclusion was made that capital adequacy positively and significantly predicts financial performance of commercial banks. In maintaining financial soundness of the bank, capital adequacy is essentially important. The study also concludes that credit risks erode profitability of banks arising from defaults or delay in remitting loans on time. A conclusion is thus made that liquidity of the bank is crucial in enabling the bank fund its assets and meet their day to day operational obligations. Finally, it was concluded that audit committee moderates the effect of CBK prudential guidelines on financial performance of commercial banks in Kenya. A recommendation is made that banks ought to strictly maintain requisite capital adequacy at all times. Tightening of liquidity measures especially taming illicit money is important in enhancing liquidity in the banks. The banks are supposed to revise existing regulations in order to mitigate the growing concern of non-performing loans. The study recommends more audit meetings annually to ensure that all systems and activities of the bank are undertaken as required. There is need for review credits systems so that lending procedures are tightened.
Description
A Thesis Presented to the School of Business, Economics and Tourism in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Science in Finance of Kenyatta University, April 2025.
Supervisor
1. Ambrose O. Jagongo
2. Fredrick W. S. Ndede