Prudential Regulations and Financial Performance of Commercial Banks in Kenya

Keston Enock Kiplagat, Fredrick Kalui


Prudential regulation forms a critical part of operations in the banking sector. The aim of the regulations is to protect investors and consumers and ensure systemic stability. Consequently, commercial banks are required to maintain adequate level of capital, liquidity, asset quality, credit risk and management efficiency. In Kenya, the CBK implemented the prudential regulations in 2013. However, there is no consensus from existing studies whether the new regulations have a positive or negative influence on bank performance. The main objective of this study was to determine the effect of prudential regulations on the financial performance of commercial banks in Kenya. The sample comprised of all 43commercial banks operating in Kenya observed over the study period, 2013-2017.Data was extracted from annual financial reports of the banks and Central bank of Kenya (CBK) annual regulatory reports, which reduced the sample to 36 banks. The study adopted correlation research design and examined the relationship between the independent variables and performance. Multiple regression model was used to determine the linear relationship to examine the effect of the prudential regulations of profitability of commercial banks. From study findings, liquidity management, credit risk management and management efficiency has significant effect on the financial performance of commercial banks while capital adequacy and asset quality has no significant effect on the performance of commercial banks in Kenya. The research findings are useful to the CBK and banks, as it demonstrates the extent to which new prudential regulations influence the financial performance. Variables contributing positively to financial performance should be strengthened while those influencing performance negatively should be reviewed. This will enable the formulation of policies and strategies that will help in running the operations of commercial banks. The investment advisors and analysts use the research outcome to advise their clients on the future prospects and sustainability of investments in commercial banks. The study recommends adoption of the regulation as it affects banks financial performance thus improve banks stability and reduces chances of insolvency.

Keywords: liquidity and credit risk management, management efficiency, capital adequacy and asset quality, financial performance

DOI: 10.7176/RJFA/11-14-06

Publication date:July 31st 2020

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