Khamusali, John Wenslause2026-02-242026-02-242025-10https://ir-library.ku.ac.ke/handle/123456789/32549A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Business Administration (Finance Option) of Kenyatta University, October 2025 Supervisor: 1.Mathenge TheuriCommercial Banks have an important function in driving the Development of a country. There is a huge necessity for banks to be closely monitored and regulated to provide protection to both those making deposits and those making investments, inorder to ensure overall financial stability. In Kenya, the challenge of effectively overseeing Tier 2 banks in line with Basel guidelines remains unresolved. This research aimed to assess the effect of prudential policies on the financial performance of second-tier banks in Kenya. By exploring key variables such as credit control, liquidity, corporate governance, and capital regulations, the research uncovered the mechanisms that influence financial performance within this sector. The study was framed within several theoretical perspectives, including public interest theory, risk management theory, efficiency theory, and corporate governance theory, to clarify the function of prudential policies in shaping the financial prowess of Tier 2 Commercial Banks. The research focused on 100 bank employees from Nairobi County, utilizing a census sampling approach. A descriptive research design was adopted, with structured questionnaires used to gather data. Ethical concerns were carefully considered and addressed throughout the research. Descriptive and inferential methods of statistics were employed, using SPSS version 25 for data analysis. To ensure the reliability and validity of the data, four diagnostic tests normality, multicollinearity, heteroscedasticity, and Hausman were performed. Descriptive statistics confirmed the appropriateness of the respondents, while inferential analysis revealed that the regulatory factors (credit, liquidity, capital, and corporate governance) showed varying degrees of significance in relation to the financial performance of Tier 2 banks. All four factors had p-values higher than 0.05, indicating that they did not have a statistically significant impact on financial performance. The coefficient of determination (R²) was found to be 0.797, suggesting that the model explains 79.7% of the variation in financial performance. The adjusted R² value of 0.771 indicated that 77.1% of the fluctuations in financial performance could be attributed to the regulatory and governance factors analyzed in the study. Based on these findings, the research recommends that Tier 2 banks reassess their existing prudential policies to improve financial outcomes. It also suggests that the Central Bank of Kenya (CBK) should establish new regulations, procedures, and guidelines aimed at enhancing financial performance. Future research should explore additional factors influencing the financial performance of Tier 2 banks and the broader banking sectorenThesis