Effect of Prudential Guidelines on Financial Performance of Listed Commercial Banks in Kenya

Abstract

The financial performance of banks crucial towards the stability of the financial sectors which has a potential effect on economic growth. Commercial banks offer a variety of financial services which includes: savings accounts, current accounts, investment services, insurance and offering credit to borrowers. The Central Bank of Kenya issued guidelines which have been termed as the prudential guidelines which provide a framework for risk management. The general objective of this study was to examine the effect of prudential guidelines on financial performance of listed commercial banks in Kenya. The specific objectives were; to determine the effect of capital adequacy on financial performance of listed commercial banks in Kenya, to establish the effect credit risk on financial performance of listed commercial banks in Kenya, to find out the effect of liquidity on financial performance of listed commercial banks in Kenya and to examine the moderating effect of bank size on financial performance of listed commercial banks in Kenya. This study was based on three theories; Public interest theory of regulation, Capture theory of regulation and liquidity preference theory. This study took up a descriptive research design. The population of this study was all the 11 listed commercial banks at the Nairobi Securities Exchange in Kenya. Secondary data was collected from the annual audited reports of listed commercial banks from 2013 to 2017 which was a period of five years. The data was collected for each individual bank and this means that the study was a panel data analysis. A multiple regression analysis was done in order to establish the relationship between prudential guidelines and performance of listed commercial banks in Kenya. Data analysis was done using STATA and presented in frequency tables and graphs. The study found out that liquidity had a negative and significant effect on financial performance of listed commercial banks in Kenya. Further, capital adequacy had a positive but non-significant effect on financial performance of listed commercial banks in Kenya. Credit risk was found to have a negative and significant effect on financial performance of commercial banks in Kenya. Lastly, firm size was found have a positive and significant effect on the financial performance of commercial banks in Kenya. The study therefore recommends that commercial banks should adhere to the capital adequacy guideline as capital adequacy was found to affect performance of banks positively. Equally, banks need to manage liquidity, credit risk prudently since they influence performance of the entities significantly.