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

Abstract

The objective of the study was to establish the effect of banking regulations on financial performance of commercial banks in Kenya. This study was anchored on three theories namely; Modern Portfolio Theory, Modigliani and Miller Theory and Liquidity Preference Theory. A cross-sectional correlation research design was used for this study to enable the researcher to observe two or more variables at the point in time and is useful for describing a relationship between two or more variables. The populations for this research included listed Commercial Banks in Kenya. The study used secondary data for the purpose of analyzing the relationship between bank regulation and financial performance for commercial banks in Kenya. The secondary data was collected from the financial statements of the banks. The data collected was cleaned, validated, and edited for accuracy, uniformity, consistency and completeness. The study then used Statistical Package for Social Science (SPSS) to analyze the quantitative data. A linear regression model of financial performance versus regulations was then applied to examine the effect of banking regulations on financial performance of commercial banks in Kenya. The study concluded that capital regulation requirement, liquidity requirement and risk management have a positive effect on return on assets. The study further established that mean capital requirement and mean liquidity requirement have a significant effect on return on assets. The mean risk management however does not have a significant effect on return on assets. Overall, the study established that the model is not significant in explaining performance of the Commercial banks. This means that there are other determinants of return on assets of commercial banks in Kenya. The study recommends that the commercial banks should not be extremely restricted because this can create information asymmetry and consequently lead to the poor performance of the bank. However, adequate regulations should be put in place to bring sanity to the sector.