Capital Requirements And Bank Lending Behaviour Of Commercial Banks In Kenya: Testing The Capital Buffer Theory

Abstract

This study sought to examine how capital requirements affect bank lending behaviour among commercial banks in Kenya. The research tested whether heterogeneity across ownership structure exists between capital requirements and bank lending behaviour among Kenyan commercial banks. Bank-level annual data for the years between 2012 to 2018 was used. Using the panel regression model, the study finds that capital buffer which is a measure of capital requirements has a negative and significant effect on bank lending behaviour of commercial banks in Kenya. This is an indication that when banks’ capital is closer to the minimum regulatory capital, they tend to reduce the loans advanced to the customers. Further, it was found that bank risk and ROE have an insignificant and positive impact on bank lending behaviour while monetary policy rates, inflation rate, real GDP, commercial bank leading rates and capping of interest rate were evidenced to have a significant effect on bank’s behaviour of lending. Analysis of Variance (ANOVA) results shows that the relationship between capital requirements and bank lending behaviour for the private and foreign owned banks were statistically significant whereas for government owned banks was statistically insignificant and the results confirms the existence of heterogeneity across ownership structure as well as the applicability of capital buffer theory in Kenyan context. Therefore, the study recommends that though minimum capital requirements has a negative effect on loan lending rates, CBK should continue with the regulations in order to protect the depositors money. But to encourage loan lending, the regulator should lift interest rate cap so that banks can advance more loans to the customers especially to the small and medium enterprises