The Effect of Central Bank Prudential Regulations on Performance of Commercial Banks in Kenya

Abstract

The banking industry is usually faced with challenges such as globalization, financial crisis and government regulations. Regulation is defined by Llewellyn (1986) as an organization with particular conditions or approved behavior, enforced by a government or other external agencies or self-imposed by clear or implied agreement within the industry, that curtails the activities a business operation of a financial institution The core purposes of regulation are to ensure a sound and stable financial system, and protect deposits made by the public and lower the levels of risk that bank creditors are exposed to. The measure of actual output against the projected output is known as performance, that is, its objectives and aims. The study Research Objective was to determine how CBK prudential regulation affects the performance of banks in Kenya. The research adopted a descriptive research design. The investigation was a census study utilized primary data. Standardized questions made measurement more particular by effecting uniform definitions upon the participants as well as making sure that similar data was collected from groups then deduced comparatively. The populace of the study was all of Kenya‟s commercial banks in operation as at 31st December, 2016. According to (Central Bank of Kenya, 2017) there are the forty three (43) Kenyan commercial banks. Among the 43 institutions, 39 commercial banks and the mortgage finance institution are owned privately while the remaining 3 commercial banks have their stakes controlled by the Kenyan Government. The instrument for data collection was the questionnaire. The respondents were the operations and relationship managers. The method used in research administration was the drop and pick method due to the necessity to collect detailed and well thought out responses. The collected data was sorted and arranged for analysis using Statistical Packages for Social Sciences (SPSS). The study found out that several factors helped to influence performance of the banks over the last five years both in a positive and negative manner. Those influencing the performance in a positive way were: restrictions on trading and guarantees, restriction on advances for purchase of land and restrictions on deposit taking while those influencing performance in a negative manner included: limit on advances, credits and guarantees, restrictions on advances, credits and guarantees, restrictions on ownership of share capital of an institution, mortgage finance companies and imposition of charges and payment of interest. The study recommends that some of the factors that the Central bank needs to put into consideration with relation to improving the banks performance would be to change policies or regulation for limit on advances, credits and guarantees, restrictions on advances, credits and guarantees, restrictions on ownership of share capital of an institution, mortgage finance companies and imposition of charges and payment of interest.