Ngatia, James2025-04-042025-04-042024-10https://ir-library.ku.ac.ke/handle/123456789/29917A Research Thesis Submitted to the School of Business, Economics and Tourism in Partial Fulfillment of the Requirements for the Award of Master of Science in Finance of Kenyatta University, October, 2024 Supervisors: 1.Daniel Makori 2.Joseph TheuriTier three banks are vital to the Kenyan economy by promoting competition and ensuring efficiency in the banking sector. Despite their importance, recent statistics indicate poor performance among these banks, possibly due to their financial practices. However, limited research exists on how the CAMEL indicators affects their financial performance in tier three commercial banks. This study addressed this gap by analyzing the financial performance of Kenya’s tier three commercial banks through CAMEL factors: capital adequacy, asset quality, management, earning ability, and liquidity. The study was guided by Free Banking Theory, Agency Theory, Capital Buffer Theory, and Transactional Cost Theory. An explanatory research design was adopted, targeting 18 tier three commercial banks. Secondary panel data were collected from the banks' records over a period of ten years (2014-2021). The regression results revealed a coefficient of determination (R-squared) of 0.6918, indicating that 69.18% of the variance in financial performance (ROA) is explained by the CAMEL variables. The analysis identified that Capital Adequacy, Asset Quality, Management Quality, and Liquidity significantly affect the financial performance of tier-three commercial banks, while Earnings Ability did not show a statistically significant effect. The study further examined the moderating effect of Ownership Identity on the CAMEL-ROA relationship, but the findings indicated that it does not enhance the predictive power of the model. Consequently, Ownership Identity was ruled out as a significant moderator. In conclusion, the study emphasizes the importance of maintaining adequate capital buffers, improving credit risk management, and ensuring sufficient liquidity to enhance profitability. Future research should investigate other potential moderating variables influencing financial performanceenThesis