The Effect Of Regulations On Financial Performance Of Commercial Banks In Kenya

Abstract

The objective of this study was to determine if there is a relationship between regulations and financial performance. Regulations is the independent variable while financial performance is the dependent variable. Financial performance is measured using financial ratios such as return on capital, return on equity, return on assets, credit risk, liquidity ratio, interest coverage ratio, core capital to total risk weighted assets ratio, total capital to total risk weighted assets ratio and core capital to total deposit liabilities ratio. This study also analyses capital adequacy. The population of study is the 43 commercial banks in Kenya and the period of study is between 2010 and 2015. Three years before the reviewed prudential guidelines for banks of 2013 came into effect and three years after. Chi square test of independence was used to analyze the relationship between the two variables. The test was carried out on each of the ratios and the findings were that there is no relationship between regulations and financial performance of commercial banks. Most of the banks have been able to comply with the minimum capital requirement and the government must continue to ensure that there is compliance of the stipulated guidelines in order to ensure the stability of the banking sector in Kenya. This will enable Kenya as an economy avoid financial crises. The CBK will also be able to discover struggling banks and provide remedial measures to manage them before they collapse and depositors lose their money. The finance ratios suggest a thriving banking sector that is profitable. This study did not factor in macroeconomic factors that may affect the financial performance of commercial banks and these may be helpful in a similar study in the future that also analyses a longer period of time.