| dc.description.abstract | Capital provides buffer against losses and thus it ensures safety and soundness of the
financial institutions. It is necessary to ensure that the banks have sufficient capital.
Capital regulations are therefore put in place to ensure that the banks meet the minimum
capital requirements expected of them.
This research project aimed at assessing the effect of capital adequacy requirements on
credit creation by commercial banks in Kenya. Data for a period of 11 years from 2001 to
2011 was studied where an econometric model was used. For this purpose, data from 43
commercial banks in Kenya was extracted from CBK annual bank supervision reports.
The study revealed that capital adequacy requirements introduced by Basel 1 had a
negative impact on credit creation by banks in Kenya. This was evident especially in
2000 when the requirements were introduced in Kenya and in 2009 when further
enhancement of minimum statutory capital requirements from Kshs. 250 million to 350
million (all the way to 1 billion by December 2012) was introduced. The trend in credit
created has been changing direction every four years a fact that can be attributed to
shocks emanating from the piecemeal enhancement of capital adequacy requirements by
the Central Bank of Kenya. The study generally shows that the volume of existing bank
capital may act as binding constraint on liquidity and credit creation.
It is worth noting that there could have been other factors accounting for variations in
credit created trends other than the capital adequacy requirements as experienced in 2005,
a fact that could be attributed to factors such as high interest rate and reduced demand for
credit as observed by opponents such as Sharpe, (1995).
Policy makers should ensure commercial banks have adequate capital to strengthen
confidence of depositors, but capital adequacy requirements should not be very punitive
as to suppress bank activities and the performance of the overall economy. | en |
