The Effect of Capital Adequacy on the Financial Performance of Commercial Banks in Kenya

Abstract

This study is about the effect of capital adequacy on the financial performance on commercial banks in Kenya. This study sought to determine the effect of capital adequacy on the financial performance of commercial banks in Kenya. Capital adequacy is among the most regulated aspects in the banking industry across the world. All the three sets of Basel accords are anchored on Capital adequacy. The key concern being ensuring that banks have enough capital to compensate for risks they are exposed to. This study adopted descriptive research design and the population was the 42 commercial banks hence census survey was undertaken. Secondary data collected in excel sheets from financial statements of the target population was used for this study. Descriptive statistics was used to analyze the data and establish relationship existing in dependent and independent variable. To establish any causal relationship between the variables linear regression equation was used. The results established that the relationship between capital adequacy of commercial banks and return on assets is negative and significant. The findings also show that the relationship between bank size and return on assets of commercial banks in Kenya is also negative and significant. However, the findings show that the relation between asset quality and ROA of the commercial banks is negative and insignificant while the relation between liquidity and ROA is positive and insignificant. The findings further show that the relation between ROA and management quality is negative and insignificant. The study concluded that capital adequacy and bank size significantly affects commercial banks financial performance. The study recommended that the management of commercial bank in Kenya should hold sufficient capital adequacy to strengthen their banks capital.