Prudential Regulations and Financial Performance of Commercial Banks in Kenya
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Date
2020-09-02
Authors
Wangari, Mugo Hannah
Mutswenje, Shiundu V.
Journal Title
Journal ISSN
Volume Title
Publisher
IOSR Journal of Economics and Finance (IOSR-JEF)
Abstract
Banks are the primary intermediaries for the reason that in various countries of the world, they carry out
financial intermediation. Through the years, different countries have gone through an unprecedented number of
failures in the commercial banks internationally. These failures have prompted the need for a more serious
focus on suitable methods of improving the performance of national financial systems. Further than the
intermediation task, the banks’ performance of banks carries a huge implication to expansion of an economy.
The fall down in banks’ performance has been worrying. The study examined the consequence of prudential
system on performance of Kenyan banks. The explicit goal was to examine the effect of capital adequacy,
liquidity and credit risk regulation on performance of Kenyan banks. Finally, the study examined the
moderating effect bank size on the interlink between prudential regulations and financial performance of banks.
Stakeholder Theory, Liquidity Preference and Market Power concepts was of guidance. Causal design of
research was utilized in the study. The population target was 42 banks operational from 2013 up to 2018.
Census was the approach of gathering data. The data to be collected was secondary in nature. The analysis
involved the application of both descriptive and panel regression analysis. In analyzing, STATA software was
used. Ethical concerns on the subject of this research was duly complied with. The findings revealed regulation
of capital adequacy had a statistically significant influence on the financial performance of banks at p value
(p=0.000<0.05). The analysis further revealed that regulation of liquidity had a statistically significant
influence on financial performance of the commercial banks (p=0.035<0.05). On average non-performing loans
stood at Ksh. 2496.78 million over the five-year period. Results further show that credit risk was a significant
determiner of financial performance of commercials banks in Kenya (p=0.014<0.05). When it comes to bank
size, the findings showed that the Kenyan banks averaged at 4.29 Billion. As a moderator, it was found that
bank size did not significantly influence the relationship between prudential regulations and financial
performance (p=0.289>0.05) and its interaction with capital adequacy, liquidity and credit risk did not have
any significant effect on ROE. The study recommends that Central Bank of Kenya should tighten regulation on
capital adequacy, to create more balance in the core capital and total assets of banks. This would bridge the
huge gap identified between banks with high capital and total assets and those with minimum core capital and
total assets. The Central Bank of Kenya should also put more effort to regulate the liquidity of the industry to
ensure that the huge gap in liquidity is minimized to promote equal growth in the industry. Tight regulations on
credit risks more so on non-performing loans should be put into effect to ensure that banks bear less risks from
the NPLs
Description
A Research Article in the IOSR Journal of Economics and Finance (IOSR-JEF)
Keywords
Capital Adequacy, Liquidity, Credit Risk, Bank Size, ROE
Citation
Mugo Hannah Wangari and Shiundu V. Mutswenje (2020). Prudential Regulations and Financial Performance of Commercial Banks in Kenya. Journal of Economics and Finance. Vol. 11, Issue 4 Ser. VIII, PP 16-30