The Effect of Regulations on Financial Performance of Commercial Banks in Kenya

Abstract

Financial performance a key focus by many will continue for an extended time due to its significance in the life of an organization. Consequently, there have been several attempts to comprehend this in terms of factors that contribute to the realization of this success and those that do not. The relationship existing between banking regulations and firms’ performance has been a discussion of interest to many with some giving positive feedback and others with negative views. This research sought to establish the effect of regulations on financial performance among commercial banks in Kenya. The independent variables for this study were liquidity regulation, efficiency regulation, capital adequacy regulation and credit risk regulation while bank size was used as the control variable in the model. Descriptive research design was used. The target population was the banks in Kenya. There are 38 banks in Kenya as at 2020 but only 37 provided complete data set. Research variables data were derived from CBK and audited bank's annual financial statements from 2016 to 2020 for all 37 banks making 185 observations. Regression and correlation analysis were used to test the study hypotheses by establishing the relationship between regulations and ROE. The study found that efficiency (β=0.007, p=0.001) and bank size (β=0.011, p=0.000) had a positive and significant effect on ROE among banks in Kenya. Credit risk β=-0.005, p=0.000) had a significant negative effect on ROE while liquidity and capital adequacy were not statistically significant. The results also indicated R2 of 0.463 which implied that the selected independent variables contributed 46.3% to variations in ROE. The study recommends the need for policy makers to focus on efficiency regulation, credit risk regulation and bank size as these three have a significant effect on ROE of banks. Managers and directors of commercial banks should also work on improving their efficiency and reducing their credit risk in a bid to enhance their performance and to remain competitive in the ever-changing environment.