Effect of Government Regulations on Credit Provision by Commercial Banks in Kenya

Abstract

Government regulations are associated to a double-edged sword that cuts across both the borrowers and the lenders in different dimensions. The regulations have the potential to affect the growth of the banks hence rendering them with little amount of money to lend. The main objective of the study was to establish the effect of government regulations on credit provision of commercial banks in Kenya. The theories anchoring the study included agency theory, signaling theory and information asymmetry theory. A descriptive design was employed for this research to describe the characteristics of the study phenomenon. The study targeted all of the 39 operational commercial banks licensed to operate in Kenya as at 2021. The study used secondary data that was collected from the Central Bank of Kenya annual reports for the study period. To achieve the objective of the study, the data was analyzed through descriptive and inferential statistics procedures. The specific inferential statistics method were correlation and regression analysis. The study findings indicated that liquidity regulation has a negative and significant effect on credit provision among commercial banks in Kenya (β = -14,288.9; Sig < 0.05). It was also established that firm size has a positive and significant effect on credit provision among commercial banks in Kenya (β = 0.603; Sig < 0.05). Given the findings, the study recommends commercial banks in Kenya to consider boosting their assets so as to improve their size. This is given the findings that larger firm size is associated with higher credit provision. Larger commercial banks have enough cushion in case of non-performing loans and therefore they can lend more compared to smaller banks. Given its detrimental effects, the study recommends the regulator of commercial banks, that is CBK to relook at the liquidity regulations that demands that commercial banks should have a statutory liquid coverage ratio of 20%. While such a ratio is important to manage any short-term shocks and prevent collapse, being too strict on the minimum ratio negatively affects credit provision. This is because some commercial banks may not have enough funds to lend as they try not to violate this requirement.